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December, 2013


While that title may be a bit catchy, 14 can be an unwieldy number of assets with which to deal. I propose that we cut that in half and work with the two smaller portfolios in relation to one another. Most investors are used to the idea of having some of one's liquid holdings in cash or its money market or certificates of deposit equivalent or in bonds or bond mutual funds. We normally do this for income as well as diversification, reasoning that if stocks plummet in market value at least we shall still have the bonds or cash. Ideally, we can then lick our wounds, rebalance, and eventually come out ahead because we shall have bought shares of stock when they were low and some brighter more bullish day hope to sell them at a nice profit when a happier sort of rebalancing is in order.

Yet these days a number of bond holdings are risky as well and in two ways: first, they offer such meager income that their return will not be able to keep up with historic levels of inflation. One's investment dollars will have shrinking buying power. Second, since bonds tend to go down when interest rates go up, and rates are now set at about the lowest they have ever been on a sustained basis, most such debt instruments could be in for a great reduction in market value once the Fed begins to raise interest rates, as our sluggish economy finally commences to pick up steam.

My suggestion is to keep only a fairly small amount of cash or short-term bond asset back, have other bond holdings whose long-term rate of income warrants the short- to medium-term chances of loss in market value, and invest the rest in stocks or exchange traded funds with good average yield plus excellent prospects for capital appreciation.

Lower Risk Assets for 2014

Type SecurityRecent
Vanguard Short-term Bond FundBSVExchange-traded fixed income fund$80.331.2%
Chevron Corp.CVXIndividual common stock$119.903.3%
Guggenheim Multi-asset Income FundCVYExchange-traded stock dividend fund$24.185.4%
Ensco PLCESVIndividual common stock$57.653.9%
EZCORP, Inc.EZPWIndividual common stock$10.310.0%
Intel Corp.INTCIndividual common stock$24.293.7%
Pfizer, Inc.PFEIndividual common stock$30.253.2%

Since a set of such holdings inevitably involves some with greater and some with lesser risk, my recommendation is that we treat the relatively less volatile, and hence lower risk, part of our portfolio as if they were our bonds (in the old diversification model), the remainder of the assets then having the role that stocks normally did in one's nest egg before.

How this would work in a hypothetical portfolio can be demonstrated using the two tables. First, an equal amount is invested in each of 14 assets (and thus each gets 7.143% of the whole). Taking into account both sets of proposed holdings, they offer a 3.0% average return (stats. based on 12/13/13 trading figures), so even if one needs at some point to wait out a downturn, he or she is getting paid better than the stock markets or most bonds generally now provide for patience.

Say one intends to invest $5000 in each (though the principle works equally for $1000, $10,000, or $50,000 each, etc.), then a total of $35,000 will be in the lower risk half of one's portfolio (in this case in BSV, CVX, CVY, ESV, EZPW, INTC, and PFE) and another $35,000 will be in the higher risk holdings (in this case in CSPI, ELP, PBR, PKX, PTY, SNE, and UWM ). It is best if each of us comes up with his or her own appraisal of the assets to hold in a lower vs. higher risk sub-portfolio. While this is mine, you may have equally good conclusions about a set of likely to be profitable investments and whether they are or are not as risky compared with the rest.

The advantage of this kind of division of the overall portfolio is that one portion of the nest egg then will tend to have greater stability in a rough seas type of market, while the other will tend to provide greater total returns in a bullish period of favorable market values. Just as for selling what is now high and buying what is now low between a bonds vs. stocks allocation, the differences in returns between the two may be used for greater profits via rebalancing.

This worked well for us in the market meltdown that occurred in 2008, for instance. At that time, Berkshire Hathaway was one of the major stocks on the lower risk side of our total share holdings. Combined with a few other value assets, it kept our lower risk sub-portfolio well ahead of the level to which the riskier half of our assets had dropped, so we were able to sell still profitable shares in BRK/B and buy up now bargain level shares of riskier holdings, lowering their average cost bases.

Higher Risk Assets for 2014

Type SecurityRecent
CSP, Inc.CSPIIndividual common stock$8.214.9%
Companhia Paranaense de Energia (ADR)ELPIndividual common stock$13.293.5%
Petroleo Braileiro, S.A. (ADR)PBRIndividual common stock$13.790.0%
POSCO (ADR)PKXIndividual common stock$77.861.9%
Pimco Corporate & Income Opportunity FundPTYClosed-end fixed income fund$16.999.2%
Sony Corp. (ADR)SNEIndividual common stock$17.481.3%
Pro Shares Ultra Russell 2000UWMExchange-traded leveraged equity index fund$77.160.0%

In subsequent years, the riskier side of our portfolio has in its turn been shining, so that, as the current bull market has surged, on several occasions it has been appropriate to rebalance and sell them to buy up more low risk equities.

I suggest rebalancing one's intended allocation (such as a 50/50 division between lower and higher risk assets) effective the end of April and the end of October (to take advantage of the seasonal trend for lower profits or even for losses in the May through October period) or otherwise whenever one sub-portfolio has more than 55% of the total.

If 2014 runs true to form for second years of the four-year presidential election cycle, there is likely to be opportunity for rebalancing next year, quite possibly on both the down- and upside.

The tables have presented, first, a selection of reasonably promising lower risk vs., second, relatively profitable higher risk securities for one's 2014 investing consideration.

We wish for you in the coming year many happy personal as well as investment returns.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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