On my previous contribution, ‘How do you know if your portfolio contains good shares’, I received many positive comments. Sufficient reason for me to delve a little deeper into compiling a portfolio.
Are analyses of third parties important to you, or do you prefer analyzing yourself? Good, and do the gained buyable shares adhere to your available time horizon?
Most investors are familiar with terms such as diversification, sector allocation, and geographic allocation. Most investors are also in agreement on spreading currency risks.
But how about the volatility of buyable shares? Are your shares spread out sufficiently on the basis of volatility?
During lectures, I frequently revisit the importance of investing in robust trend shares. I often spoke of having 80% of your portfolio in trend, and at most 20% in countertrend.
At present, I have refined it and sooner speak of a 90/10 proportion.
Interesting, but third parties will still provide you buying advice from which the rates have gone down so much, you absolutely have to get in. In my opinion, these are the shares from the 10%-at-most category.
Investors like seeing a share being super cheap. Because, if the graph has dipped down so steeply, it can only get back up again. In order for the graph to rise, however, you do need buyers – many buyers who feel that the company in question is performing well again. This process can take a long time, and during this long period of time, many other shares – shares which will make the stock market index leap up — will just do what they do: they rise.
If your portfolio mainly contains trend shares that primarily move upward, you will have checked those relatively quickly. As long as they are in an upward trend, nothing is wrong.
If your portfolio contains volatile countertrend shares, for which it is unclear whether the upward trend will or will not recover, you ought to keep an extra close eye on them.
Shares from the uranium sector have recently become more popular (see fig. 1). Increases of 20% a day, only to drop with 15% on the next. The uranium price recovers, but the recovery is fundamental. If we return to 20 (%/pound) from the current 25 ($/pound), or the price of this natural resource passes through its current resistance in order to continue growing in the direction of 35: the price level with which most uranium companies make profit again. These types of investments ask for much more effort, or your investment is in a losing position.
Volatility calculates the upward and downward movement of a rate over a certain period. The higher the volatility, the higher the potential short-term yield.
Beta calculates the volatility (or possible yield) of the share relative to the complete market. This number is around 1 for all shares. Higher than 1 means that it is more volatile than the market, smaller than 1 means less volatile than the market average.
For instance, the American share Wal-Mart has a beta of 0.12 (fig. 2). FCX has a beta of 3.31 (fig. 3). Beta, in summary, stands for a higher or lower risk. If the market rises with 10%, the share FCX rises with 33%.
Consequently, volatility is a simple yet very interesting touchstone to help choose shares within your portfolio.
Ask yourself: Do I have a lot of time to follow up on my shares, or will I go through them once a week?
At the same time, beta can calculate the risk of your portfolio. To calculate this, multiply the percentage allocation of each share with its beta. If the sum of all products is <1, the change that you will beat the market is very small. Your risk, on the other hand, is very limited.
In the bio sector, most shares are very volatile. Take the share Thrombogenetics (Euronext Brussels) as an example. Yet, it is possible for shares with high volatility to barely move for months.
The first six months in the graph above were fairly quiet. In September, the rate goes up, and consequently so does the volatility… At the start of October, the share breaks through its important four-euro resistance. Let’s say you are interested and you decide to buy.
The rate rises the next couple of days, and reaches a peak of €6. As an active investor, you sold a part along the way and collect the leftover profits.
An inactive investor, however, is enjoying this less and currently deals with a loss of 15%.
