In response to Rag2Riches & others’ recent questions,
1. You said you liquidated 100% of your stock market holdings, yet you will gain more from long than short positions. Are you referring to your company stock, or are you still holding other stock?
2. What do you mean you were caught unhedged? You mean you don’t have puts or short positions? Because your heavy allocation to PM seems to be a hedge.
3. You have high net worth already, why not go with a more conservative asset allocation rather than shooting for high outperformance with concentrated (risky?) positions?
First of all, from my net worth page (where you can see the daily history since last May) and 3/20/07 post, I have
17.5% in home equity
21% in my company holdings (stock options, shares, etc.)
61% in my owned stocks+cash+etc.
Within that 61% of stocks+cash, I have
26% in cash (which can be calculated from 87832.96 / 333851.28, taken from 07-03-20 date on my net worth page).
Within 61% * (1-26%)=45% for the rest, I have (from 3/20/07 post)
57.5% in metals
34.6% in energy
7.9% in water, agriculture, consumer staples, etc.
Here are some detailed answers to the above question, so that readers know exactly where I stand (in terms of my investment):
1. By “general stock market” holdings, I meant things like SPY, QQQQ, DIA, or any large to small cap mutual funds. I bought some in last summer. I’ve pretty much liquidated 100% of any holdings related to general stock market.
I don’t consider most of my metals+energy stocks as “general stocks” since they usually have less correlation to the general stock market.
But the synchronization theme is still with us since last May. Currently, the correlation of all international markets, energy, and metals is still pretty high. Therefore, I said I would still benefit from my long positions in energy+metals.
I am not considering any effects from my company holdings in the above statement (although I should definitely benefit more).
2. All of my metals & energy positions were unhedged. They went down along with the stock market (and actually by twice the percentile amount). Synchronization still. I didn’t have significant shorts/puts against general stock market nor my positions in metals & energy.
3. My investment would appear to be risky to anyone. But I balance them out through large holding of cash (26% * 61% = 16% of my current net worth) plus my home equity (17.5% of my net worth). All of those are cash or bonds (“paying interests” to myself) which is already some 33.5% of my total net worth. Home equity is obviously subjected to the house valuation, but I would prefer a cheaper housing so that I can upgrade.
In any case, I have about two thirds (1-33.5%) of my net worth in “risky” investments, which supposedly should balance themselves out somewhat. They are
45% of my net worth in mostly energy+metal stocks, and
21% of my net worth in company holdings (high-tech) but the leveraged power of my company holdings is actually much bigger than my 45% unleveraged holdings in energy+metals (less than 2X however).
I think by most measures, I am probably taking less risk than I should be taking, especially given my age.
I’ve gone through some crash analysis of my own net worth, and I can sustain a 100% loss in my company holding (21% of my net worth), or 100% loss in my home equity (17.5% of my net worth), or 50% loss in my own energy+metal stocks (~22.5% of my net worth). All the above events, I will still have 80% of my net worth, assuming they don’t happen simultaneously.
The bet is that energy+metal will negatively correlate to my high-tech company holdings and my home equity. In the case of falling home equity, it will only translate into an improvement of my life standard. So I don’t worry about that. Overall I think I should be in pretty good shape, with my asset allocation plan.
At other times when I’m more bullish in my own investment, I would be utilizing more cash to hold more energy+metal stocks in order to counter-balance the combined total of my high-tech company holdings and home equity which are quite a big sum to hedge in leveraged terms.
Obviously I believe in what I’m investing in energy and metals. But even more importantly than a potential high(??) performance, they also serve as a very good counter-balance against my high-tech company holdings (well, not all the time obviously, but at least that is the plan.)
If I have liquidated my stock options, my asset allocation will most certainly look a lot different. At the minimum, I will increase my general stock market holdings from 0% to some significant percentage. Currently, I’m assuming that my company stock will positively correlate to the general stock market, and I don’t want to increase any more exposure to it. This assumption is an aggressive bet which is counter-balanced by my commodity investments.
You can see how spectacularly my strategy failed from 05/09/06 to 06/13/06 (21.2% loss in 1 month), and 05/09/06 to 7/23/06 (28.4% loss in 2.5 months) timeframe in the history of my net worth, when my commodity stocks + my company stock went down together very hard. The biggest reason for such a big fall was that my company holdings were about 31% of my net worth on 05/09/06, and I almost lost all of that. But I’m willing to take the risk with the leverage afforded to me through my stock options for a couple of more years. In fact, it is with this leverage in my company stock options, such that I’m willing to allocate more to commodity investments. I have made up most of the lost grounds in my net worth through savings and my investments since 05/09/06 even when the value of my company holdings needs to be 50% higher to be on par with 05/09/06.
This is probably the most detailed and up-to-dated account/analysis of my current net worth & my own asset allocation strategy.
My strategy is definitely not for everyone, given my own special situation. If I calculate my metal holdings using a leveraged combined/controlling value of my home, stock options, etc. as 100%, the PM only comes out to be just 15% to 20%. This is more than 5% recommended by “textbooks”, but probably not an out-sized bet.