Wednesday, December 03, 1997

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Dec. 3, 1997)

Scroll to the bottom for year-to-date Growth and Value Screen results.

Given the plethora of stock screens we follow in the Workshop -- some would call it a plague instead -- a number of readers have asked how they might approach putting these pieces together into a single portfolio.

To my mind, there are three basic questions one needs to address when using these pieces to create a whole portfolio approach.

First, how many stocks do you want to hold altogether? For diversity's sake, I prefer a portfolio of fifteen to twenty stocks, as I've discussed on several occasions. Quite simply, if a stock in your portfolio gets sliced in half, the total damage done to your portfolio is minimal with twenty stocks (only 2.5%), whereas with a four- or five-stock portfolio, the loss would be 10.0% to 12.5%. Having your risk per stock spread out a little further takes the burden off of you to watch each stock constantly, which, of course, is the antithesis of unemotional investing. The number of holdings, however, also has to match up with your ability to control trading costs. If your portfolio is $5,000, for example, you can't afford the forty trades a year a twenty-stock portfolio might generate. I recommend choosing the largest number of stocks up to twenty that you can manage without letting your annual trading costs exceed 2% of the portfolio total. Assume each holding will generate two trades per year (a sale and a purchase to replace it) and make your calculations accordingly.

The second question addresses how you want to split your overall portfolio between value strategies and growth strategies. I've written frequently in the past that one good way to make this determination is based on your age. When you are young, it makes sense to be more aggressive in focusing on growth strategies. As you approach or enter retirement, being a bit more conservative (yet fully invested in stocks) is justified. A quick-and-dirty method is to subtract your age from one hundred. Round the answer off to the nearest ten and that's the percentage you might consider putting into growth strategies. For example, a thirty-year-old might place 70% of his portfolio in growth stocks, the rest in value stocks, whereas a sixty-year-old investor would reduce that emphasis on growth stocks to 40% of his total.

The third question is perhaps the most difficult -- deciding which strategies within those two camps to employ. And there are no guidelines here. You need to consider tax ramifications of strategies that require more frequent trading. You should consider your willingness to accept volatility in deciding between large-cap and small-cap strategies. You should consider how easy a strategy is for you to use.

Let's work through a simple example. Our unemotional investor is fifty years old and has $50,000 to invest. He decides to hold twenty stocks because even if each stock changes every year, his total commissions would be just $320 (forty trades at $8 each), which represents only 0.64% of his total portfolio.

Based on his age, he's decided to split the portfolio exactly in half, with $25,000 going into ten growth stocks and $25,000 going into ten value stocks.

Because he doesn't want to trade more than once a year, he's opted for annual updates on his growth stocks as well as on his value stocks. To choose his growth stocks, for example, he could select ten Keystone or Formula90 stocks, or five of each, whatever growth strategies he likes to find his list of ten stocks for the year.

For the value stocks, again he has choices. He can choose the High-Yield Ten from the Dow, or another high-yield approach like Beating the S&P, or he can choose five stocks from each. Again, whatever strategies he likes the best can be used to identify his ten value stocks.

Then the maintenance of the portfolio is simple. He invests $2,500 in each of the twenty stocks and goes fishing for a year. No nervous watching, no sell-stop tactics to follow, just getting on with life. Even if one of his twenty stocks is a complete disaster, only 5% of his total portfolio is at risk there.

Let me point out again that this is just one way to build a portfolio. If you enjoy the financial hunt and want to choose each of your stocks individually, more power to you. You may find your returns put these models to shame. And the hunt itself is part of the fun for many investors.

But if you aren't the type who gets excited about digging through annual reports and trying to decide which of two drug stocks is really the better choice, learning how to let other resources help you do your research is nothing to be ashamed of. I'm partial to Value Line, for example, because it's been around almost as long as I have and has a terrific real-time historical record. Starting with their research saves me a lot of footwork.

Whatever method you use to ferret out your future holdings, though, be sure that you understand as much about it as possible. It's only when you genuinely understand an approach and the theories rooted in financial analysis that underpin it, however simple or complex they may be, that you can make it work consistently for you. Fool on!

Year-to-Date Returns
Monthly Growth Screens
72.60%  Relative Strength  
30.58%  S&P 500 Index  
27.71%  Investing for Growth  
23.27%  EPS Plus RS  
13.47%  Formula 90  
  9.80%  Unemotional Growth  
  8.66%  YPEG Potential  
  6.10%  Low Price/Sales  

Year-to-Date Returns
Annual Value Screens
28.72%  Beating the S&P  
26.63%  Foolish Four  
24.56%  Dow Jones Ind Avg  
24.01%  Dow Combo  
23.69%  Dogs of the Dow  
22.43%  Unemotional Value  
22.43%  Beating the Dow  

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