Using The Plug & Play Portfolio Models


Summary

  • These models are updated quarterly to provide investors with a guide for building a portfolio.
  • Buy zones are included through the chart links in the watchlists (VSLs).
  • Overbought, oversold and momentum technical indicators should be checked before buying any security.
  • Focus on asset allocation above security selection as that will determine at least half of your long-term profits.
  • Always focus on risk management as your first priority.

My “Plug & Play Portfolio Models” present investment ideas from our “Very Short Lists” that are near buy zones as of the first week of the new quarter.

These are NOT model portfolios to be jumped into right now! There is no such thing. Anybody who offers a “buy all of these now” model portfolio is telling you to walk through a field where a herd of bulls were recently relieving themselves. 

The “Plug & Plan Portfolio Models” should be monitored weekly and used to build or rebuild your asset allocation for the intermediate and long term.

Asset Allocation Cash Levels

To make things easy to look at and build towards, the Plug & Play models are built as if you are fully invested. Because we do not all have the same financial circumstances or risk tolerances you must first decide if you want to be fully invested right now. 

So, the first question for you to answer as you build your portfolio is this:

How much of your investable assets do you want invested right now?

I have three mindsets with appropriate cash levels for you to start building from. Very simply, these are based on how “in” the markets you want to be right now. The sales driven financial industry classifies people as “conservative,” “balanced,” and “aggressive.” There is some merit to that, but I don’t think those fully capture the investor mindset.

For lack of more creative words, I call these levels:

  • Defensive
  • Cautiously Optimistic
  • Pedal To The Metal

Here is how I am defining each group: 

Defensive: you are very concerned about the economy and a potential crash in the next year. Missing some upside is worth the peace of mind and having the ability to sleep knowing you are safe. In general, this position is a short-term position. You are an “intelligent investor” with a lower tolerance for risk and some income generation capital to protect. 

You will rarely be defensive for longer than a year. You will never be defensive for longer than two years. Cash holdings for defensive investors will be between 50% and 75%. You should never be 100% in cash since that will kill your purchasing power.  

Cautiously Optimistic: you are generally bullish, but want to have some cash on hand as a hedge for risk and to take advantage of any opportunity. This is where most people should be most of the time. We know that in the long-term stocks go up. However, there are choppy periods in the markets and everyone has a different risk tolerance. In addition, retirees need to protect income generating asset bases. You are an “intelligent investor” with a normal tolerance for risk and have a long-term view of investing for growth, or growth and income.

You will regularly hold a a cash position in the 5% to 15%. This cash is used to “buy the dips” and for unexpected correlated market corrections that yield us investment opportunities. From time to time, but generally not more than three times per decade, you will let your cash position rise to between 25-50% because valuations are too high and economics are too uncertain. 

Pedal To The Metal: you are a bullish long-term investor who can withstand 20-30% account value swings without breaking a sweat. You are trying to be in the best asset classes all of the time as best you can. You know sometimes you will fail, but with proper risk management can keep your failures small, while letting your winners run. You are an “enterprising investor” who wants to maximize long-term returns. 

You will rarely hold as much as 15% in cash. Your typical cash position will be about 4-5% as you rotate and upgrade your portfolio from month to month. 

Building Your “Strategic” Model Portfolio

A model portfolio is the “strategic” asset allocation that you gravitate towards. You will “tactically” adjust though as the markets and economy change.

Here are the strategic asset allocations that most fully invested investors gravitate towards: 

Defensive Investors: 60% equities and 40% bonds is industry standard. My view is 60% equities, 20% bonds, 20% alternatives, such as, commodity linked securities, preferred stocks, convertibles and listed private equity.

Cautiously Optimistic: 80% equities and 20% bonds is industry standard. My view is 80% equities and 20% alternatives. 

Pedal To The Medal: 100% equities is industry standard. My view is 80% equities and 20% alternatives. That is, in fact, the same as Cautiously Optimistic investors. So, what is the difference? The Pedal To The Medal investor isn’t going to hold the large cash balances that a Cautiously Optimistic investor will sometimes.

Investing Strategy Thoughts

If you are using ETFs as your entire portfolio, then Global Trends ETF or Retirement Trends ETF is for you.

If you are using an ETF portfolio as your core and then adding stocks, having 12 (growth investors) to 20 (retirees) stocks is the way to go. The smaller basket of stocks allows you to focus on your best ideas. The ETFs give you diversification and reduce single stock risk. I generally recommend 50/50 ETFs/stocks.

If you are using primarily stocks (75% or more of assets), then holding up to 30 stocks to spread risk is advisable. Very few people should hold 30 stocks simply as a matter of having the time to keep up with them all.

All investors should use the Invesco QQQ (QQQ) which captures the Nasdaq 100 and Ark Investments Innovation ETF (ARKK) as core holdings giving exposure to large and some mid cap leaders. Both beat the S&P 500 (SPY) regularly over virtually every time frame.

If you are primarily a dividend investor, you will still want 15-25% of your assets in a combination of QQQ and ARKK (at about a 3:1 split) to give yourself exposure to large and mid cap leading growth companies (many of which pay a dividend).

Chart
Data by YCharts

Note that ARKK’s performance is largely tied to Tesla (TSLA) and several other stocks as it only holds 30-40 stocks. It is concentrated and will be volatile, hence, why most people should hold more QQQ.

Regardless of the size of your core, QQQ and ARKK are very good pieces to build around. 

How To Buy Investments

Make sure to mind the buy zones and scale in at 2 or 3 support lines as marked by Fibonacci levels, particularly, where multiple lines are close together (confluence). You can observe the past structure of an assets chart to see where prices fell to before buyers came in. Those rough levels often repeat. Look for price zones where prices in the past “jitterbugged” around for a while.

The top end of the buy zones are for those who need exposure or are particularly bullish. I generally make my first buy a level or two below the top of the buy zone looking for more margin of safety. I generally target the “jitterbug” zones.

Here’s an example of a jitterbug zone for the iShares Semiconductor ETF (SOXX):

SOXX “jitterbugs” in the orange box.

Notice that price bounced around in the orange box before breaking out. When it corrected, it came back to the orange box, not once, but twice. That is the area where I would target to buy SOXX for an entry or addition.

I generally target the top of those boxes as we expect prices to rise in the long-term for many reasons (not the least of which is asset price inflation due to money printers going brrr). So, for SOXX, in this example, I’d look to buy a shade under $200 even though the top of the buy zone is $221. I would add near the bottom of the orange box area at about $170 and again in the $150s.

Option Selling Basics

Near retirees and retirees who use option selling to enhance income generation will want to mix in selling puts on some growth stocks when those are oversold to generate higher income. When some of those stocks are assigned to you, then wait for a rise in price above your assignment price and near to being overbought, then sell covered calls. Rinse repeat: 

Remember:  Don’t You Dare Trade Options Until You Read This!!!  

Also, if you are selling puts, make sure to visit the RARE Chat at least weekly. That is where I will answer questions most days.

Disclosure: I am/we are long ARKK, QQQ. 

Additional disclosure: On Friday mornings I hold a free investment webinar for readers.

I own a Registered Investment, but publish separately from that entity for DIY investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.