Tuesday, May 21, 2013

Long Term Portfolio Strategy

The long term (5-10 year) growth based investment strategy:

The following is a result of months of research to develop this strategy. I use a combination of fundamentals and technical analysis to make these investment decisions.

There are 3 components to this strategy to make it work:
• Equities that have high growth potential.
• Use the value averaging method to invest in equities
• Set monthly or quarterly targets.

S&P 500 Based Equities with Growth Potential:

S&P 500 - SPY, VTI
Over the past 20 years the S&P has outperformed the Dow Jones and the Nasdaq indices by over 192% so I use the SPY as my baseline investment. VTI is a lower cost ETF that invests in slightly broader markets than the SPY.

The SPY has greatly outperformed the DOW and the NASDAQ over past 20 years.
This chart illustrates the best time to buy over the past 3 years is close to the 50 week moving avg.
Equal Weighted  S&P Index - RSP
Smaller to Mid-Cap stocks tend to perform stronger over time. This ETF  weighs the S&P equally so the small to mid capped stocks have equal weight to the larger capped stocks
RSP out performed the S&P by 62% over 10 years
FMI Large Cap Fund - FMIHX
This is a highly rated mutual fund that has outperformed the S&P by over 33% over the past 10 years. I use this as a stable fund that I never sell and reinvest any dividends.
FMIMX has outperformed the S&P every yearby 33% over
Growth Sector ETFs
I've identified 3 growth sectors and their ETFs that I believe will have exponential growth over the 5-10 years. The ETFs I've chosen are the best capitalized and most liquid in the sector.

Solar - TAN
Solar has been basing for a year now after getting crushed. Photovoltaic technology is getting cheaper and more efficient to produce. The price of the technology is becoming cheaper and more attainable. I believe this sector will breakout of this long base have explosive growth. The more competitive solar is with other energy sources such as oil, the less likely it is to fluctuate in disparity with it.

Updated chart:
Updated chart since first writing
Natural Gas - UNG
Similar to solar, natural gas has been basing for a year since it was pounded. The US has massive, untapped natural gas reserves and could be a real potential export if we can efficiently tap and transport it. Both solar and natural gas have been surging this year and showing signs of a breakout.
Year long base has formed. A breakout will likely be explosive.
New Media - PBS
The landscape of television and the way we consume it will change significantly over the next 5-10 years. I am building an investment in this area because I believe that this sector will grow exponentially.
New media stocks have outperformed the SPY by 27% over the past 5 years

Value Average Investing
Quick explanation: The investor sets a monthly target growth rate say 5% per month. Every month the investment grows by 5%. If you have $15,000 in April, in June your target would be to have $15,750. In value investing, you use an equity to leverage your investment. The more expensive shares get the less you buy, the cheaper it gets the more you buy. In the end your average cost is lower than if you were to have used the cost average method.

Here is more info and a longer, better explanation:

Backtest of a 15,000 investment in the S&P over a year (2012-13):
Although an investment was required every month, almost 8k was invested but notice more shares were purchased when the shares were cheaper and less when they were expensive.

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