Eureka Report is a subscription publication, and every day we get new members on board to follow our calls and tune in for the first time to see us explain our choices on webcasts. We get regular emails from these new members (and existing members alike) asking how they should treat the model portfolios.
Let’s run through a couple of scenarios that we get presented with – these might be familiar to some of you:
I want to start investing in line with a model portfolio. Do I buy everything, even the stocks you have a hold call on? What if you sell something shortly after I buy it? Help me, help me!
Calm yourself! There’s a very logical answer to this. The day you decide to follow a model portfolio with all or a portion of your holdings, buy the stocks in the portfolio to the weight they are currently held in the model.
There are a few reasons for this. For a start, if you are going to follow the model you are doing so to get the same performance as the overall portfolio of stocks. Each stock is held in the portfolio because the analyst believes it will add further value. The market is always forward-looking – and so are we. If we no longer believe in the future prospects of a holding it will exit the portfolio.
Secondly, the portfolio has been carefully designed and each position is weighted due to the individual stock risk. We are also wary of sector risk, not wanting to be over exposed in one area or another no matter the optimism we may be feeling towards it. Mr Market has a way of taking the shine off that optimism.
What if we sell a position shortly after you buy it? Follow the call. In the short term it may not look or feel like the best decision, but in the long run it will be.
Can I just cherry pick the ideas I think are the best?
Absolutely, however just remember the reason why our portfolios have held up so far is because they are a comprised of many stocks, not just a couple of good ideas. This means there are a number of stocks that pick up the slack when there are one, two or three or more not performing as well as we’d like.
We will not always get stock calls right. I guarantee over time any model portfolio or stock picking service you are following will get plenty wrong. When you choose to invest in just one or two of the ideas on offer, do so knowing you are taking on board the risk of those ideas being the ones that do not work out. When these ideas are taken out of the context of the portfolio, you do not have rest of the team of stocks picking up the slack.
Your portfolios are investing $100,000 but I have $500,000 and want to follow them – is this still possible given liquidity issues?
Where possible try to follow the model portfolio weights. As mentioned, they are chosen specifically with risk in mind. We understand people may be investing larger amounts into these models.It is important to keep in mind you will need to be able to get out of these investments at some point in time.
Individuals need to assess the risks of liquidity – this is done by looking at the average daily volume and you need to assess whether if you are able to exit quickly if something goes wrong given your position size. You may have to scale back your position to suit your portfolio.
Growth first model portfolio average daily volume
Income first model portfolio average daily volume
LIC model portfolio average daily volume
Patience is required and for those who are using a full service broker, this is where they earn their fees. It is all too easy to sit back and lay the boot into brokers, given the public perception of them, but they certainly are useful when it comes to finding lines of stock. You would be surprised what is not appearing on your CommSec or E*Trade screen.
When it comes to following the LIC model, wholesale/sophisticated investors (check here to see if you qualify – ASIC guide). If you do qualify and you want to invest a larger sum into an LIC you may be able to do so through a share placement. This is a one-off issue of shares by the LIC to institutional and wholesale investors. Contact the LIC you are interested in and make yourself known to them. The company may not be doing a placement in the near term but when they do, you will be on the list of people to call.
Consider these three key points when looking at Eureka Report’s model portfolios:
1. Each portfolio is designed as a collection of stocks that are selected with growth outlooks and risk in mind. If approaching a model for the first time, we recommend you buy all stocks in the model; even those with a hold call, and sell holdings as we do from the portfolios.
2. Remember that choosing just one or two ideas from a model will not guarantee the same performance, as you will not be holding other stocks that could act as a buffer if those two choices have a period of underperformance.
3. Look at daily trading volumes for the stocks and consider whether the portfolio can be exited quickly if you are looking to invest larger amounts than our initial $100,000 investment.