26 March 2011

My Way of Portfolio Rebalancing

As an employee with restricted income, I have to be very cautious on performing the portfolio rebalancing.There are certain ways of doing portfolio rebalancing in theory, but in practical, my way of doing portfolio rebalancing is after taking consideration of my current needs and risk I am able/willing to take.

Early Stage (Secondary School Time - newbie)

As different from a newbie investor, I have established a very strong mindset that enable me to putting almost 100% of my invest-able amount in Equity during early days. I still remember that when I was in Secondary school, my mother helped me to buy a stock which I forgot its name and it went bankruptcy. After which, I bought another stock which dropped from RM5.10 to RM0.50 (PSCI). From there, I learn that Intangible Asset is worthless if the management sucks.

However, because the amount that I bought during early days is relatively small compared to today, I was glad that the early failure that I 'achieved' helped me to gain a bigger success later.

University Time (A seed is planted)

When my AUM was still small (less than 5 figures), I invested in only two/three stocks. Theory of diversification couldn't help me as my aim at that point of time is to try to grow my money as soon as possible and I do not have time to do homework to read all the stocks annual report in KLSE (Bursa Malaysia). I only switched a stock to another when I found a
greater possibility to gain. For example, I did a stock screening. At that point of time, there is no Bloomberg / data line facilities, what I can do was I copied down the quarter report summary figure (e.g. EPS, NTA, DPS, Gross Profit, Net Profit, Revenue) into an excel file. After that, I copied the day end price data from Bursa Malaysia and calculate the estimated PE ratio, Dividend Yield, ROE and so on. Through Cari forum last time, I learn that ROE, Dividend Yield, D/E ratio is some of the indicators which helped you to pick the stocks or at least filter out the bad stocks.

Every quarter when there is a quarter report released, I would quickly went to Bursa listed company announcement website and download  the latest data and did the sorting again. For those companies in my top 100 list, then I would concentrate on those stocks. As I was young, I changed the stocks or performed the portfolio rebalancing every quarter, and I was very lucky to achieve positive result as it was bottom to peak period.

As I had a lot of time in this, it built foundation to me to learn more about stocks picking and I did not really had a problem of doing portfolio rebalancing as my AUM is very small at that time.

Few years later, I realized that it is not good if you want to benchmark against KLCI (Malaysia Stock Index) because your ultimate goal is to earn absolute returns. However, for a newbie, it is good that you can benchmark against index as there are quite a number of ETF (exchange traded funds) available in the market and if you can't beat the market, just follow it. :)

First Five Year Working Stage (Learning Portfolio Rebalancing)

When I was in early 20s, I joined a Singapore company and started learning accumulating my wealth through work and investing. My AUM grew faster and I couldn't believe that my portfolio grew to 5 figures in such a short time. The second working year, I moved to KL and worked in Bursa Malaysia, I started my CFA course and at that point of time, my AUM grew even faster in term of returns rate. I was quite happy that my money grew more than what I could save at that point of time.

With portfolio rebalancing, I learn that if I would like to purchase a basket of stocks, I could diversify it to 4-5 stocks in different sectors. If you invest in same sector, it could not help much as when you perform the stock picking, you will normally choose the best stock in that sector and it is very foolish for you to pick the second best stock you thought just for the need of diversification.  It is very hard for me to believe and act after I had done a very thorough process. I have learn first to read the annual report, secondly to deal with investor relations department on the finance report / any market update and thirdly attended AGM to find out more from the Top Management on their long term plan. Through experience, I found that it is good that you can hold a good company stock for long term instead of you turnover very quickly within a year. Also, it is good that you can perform bottom-up method as compared to top-down approach as there is still small numbers of outstanding company in 'Not so good' sector due to their unique business strategy, such as Mah Sing (Quick Turnover Model).

When AUM is less than 100K, it is good that you can manage the portfolio after you had done numbers of studies on the stock you would like to purchase and wait for the opportunity to buy the stock at cheaper price and hold it for long period.

When AUM is growing and becoming six figures and more, you have to be very careful on the stocks you purchased, as you cannot allow any big mistake made. The capital gain of your AUM could be more than what you had earned from your salaries. So the risk taken become smaller and the frequency become smaller too.

Later Stage
With greater capital, I am able to invest into property market which require bigger capital outflow. However, I still think that my first investment in property is not a good deal. But it is a very good opportunity for me to learn property investment from here.

Property investment is totally different from Stock as it requires you to communicate with mortgage bank agent, property agent, developers, as well as to monitor interest rate movement and deal with tenants. This could help you on negotiation skills as well as communication skills.

Last but not least

There is no perfect portfolio rebalancing but most suitable to your current financial needs and risk you are willing to take. For example, most people in year 1997 and 2007 invested most monies in stock market and they get burned when the market crash. So, it is good that you can start evaluate your financial needs and returns before you can come out with a good portfolio rebalancing strategy which suits you most.

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