Currently we have 100 shares of Procter & Gamble (NYSE:PG) or $8,649 which is below the average dollar amount in this asset class in our portfolio. I have spoken about rebalancing quite a lot lately as I believe it is an imperative item that all investors must understand. Rebalancing just doesn’t take place between different asset classes. It also can take place within each asset class. Let me give you an example. Currently we are holding $12,200 (33% more than Procter & Gamble) of Anheuser Busch Inbev SA (ADR)(BUD) in our portfolio. This stock is already up 10% from our buy in price and 12% in the last 3 months (see chart). We have a covered call written on this stock which expires in March.
If our shares are called away in March at $120, we will have extra capital to put to use and this is where we need to be prudent. Most investors would buy more and sell more options for premium ( rinse-wash-repeat). However this portfolio will not be doing that. We will be looking for more depressed equities where we believe we can get a better return on our investment. Portfolio rebalancing makes you do the opposite of what you want to do and in investing what you don’t want to do is usually the correct source of action. The purpose of this portfolio is to keep all positions small. However if some underlyings are selling for pennies on the dollar, we will rebalance (by selling the most profitable positions) and buy the depressed ones.
Finally an update on our portfolio. Our best performing positions are Newmont Mining Corp (NEM) & Pan American Silver Corp(PAAS) which are up 22% and 11% respectively. Some analysts are saying that Gold will be effected negatively by the lower price of oil. They are stating that mines will be more profitable (from lower energy prices) so therefore more metal will come to the market (supply). I disagree. I believe demand will outstrip supply as I believe these poor earnings and a slide in the stock market will prompt the FED to begin its quantitative easing measures once more. Have the courage to stay long your precious metal positions and stop listening to this noise. The central banks wont allow deflation so all hard assets will eventually soar in value.
On a final note, the breakdown of your portfolio should be aligned with your age. A follower emailed me (56 years of age) and asked about the breakdown of his portfolio. My advice was this. If you are nearing retirement, you need to have more of your capital in non volatile asset classes. Fixed income investments & cash (US dollars has been a great investment recently) should probably be higher than your stocks allocation. Also be mindful of commodities. This asset class should also be smaller as it can be get very volatile and losses can mount up quickly..