The document discusses strategies for building an optimal investment portfolio that balances risk and returns. It recommends diversifying across company size, sector, location, and timing to reduce risk while maximizing long-term returns. Specifically, the document suggests allocating 25% to large companies, 50% to medium, and 25% to small. It also provides the club's current portfolio allocations and identifies opportunities to improve diversification, such as adding more small companies. Overall, the key principles are diversifying across multiple dimensions to mitigate risk and focusing on quality growth companies.

1. THE PORTFOLIO
By Charlie Cameron, Western Wisconsin Investor’s Club

2. BIG PICTURE
We want returns but no risk. This is
impossible. A portfolio mitigates risk.
Shopping for Stocks is like shopping for
clothing, you have wardrobe (portfolio)
considerations.

3. PORTFOLIO AND BETTER INVESTING PRINCIPLES
 Goal is a 15% Annual Portfolio Return over a market cycle
(bust to boom)
 Return comes from stock price appreciation and dividends
 Dividends are reinvested
 Buy quality growth companies
 You will have an under-performer for every over-performer;
the rest will perform as predicted
 Diversify to improve returns and reduce risk

4. RISK AND RETURNS (1981 TO 2008)
Type Avg. Returns Avg. Risk Premium Standard Deviation
(%) (%) (% Volatility)
Small Company Stocks 21 17 42
S&P 500 12 8 21
Corporate Bonds 7 3 7
Government Bonds 6 2 9
T-Bills 4 0 3

5. MANAGING RISK & RETURNS WITH DIVERSIFICATION AND TIMING
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

6. MANAGING RISK & RETURNS – DIVERSIFY COMPANY LOCATIONS
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

7. COMPANY LOCATION – FOREIGN OR DOMESTIC
 Reduce market risk by owning companies from different locations
 Domestic and Foreign Markets can perform differently
 Right now, the dollar is strong and companies doing business in the US benefit
from excellent FOREX rates; this will not last forever
 Diversify portfolio between Domestic and Foreign Companies
National & Foreign
Location

8. MANAGING RISK & RETURNS – DIVERSIFY BUSINESS SECTORS
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

9. BUSINESS SECTORS
 Reduce risk by owning companies from several
different business sectors
 Balance portfolio allocation between business
sectors
 Which sector is not represented or under-weight in
the portfolio?
 Where is this sector at in the market cycle?
 Is this sector overvalued or undervalued (sector
P/E)?
Business Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Technology
Telecommunications
Utilities
Sector

10. CLUB’S PORTFOLIO - SECTOR ALLOCATION
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Technology
Telecommunications
Utilities
• Industrials and Consumer Defensive are overweight. With the sale of ISRG (12.2%), healthcare is now 4.8%
Sector

11. MANAGING RISK & RETURNS – DIVERSIFY COMPANY SIZES
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

12. COMPANY SIZE – SMALL, MEDIUM, LARGE
 Reduce risk and improve returns by owning companies of different sizes
 Large companies have lower risk but slower growth
 Small companies have higher risk but grow faster
Better Investing Model Allocation ->>>>
Company Size
(annual sales -billions)
Large (> 5) Medium (.5 to 5) Small (< .5)
Portfolio Target Allocation
25% 50% 25%
% Annual Growth Needed to Cover Risk
5 to 7% 7 to 12% > 12%
Size

13. CLUB’S PORTFOLIO – COMPANY SIZE ALLOCATION
• Very few small
companies are
represented in the
Clubs portfolio, this
could hurt long term
returns.
Size

14. MANAGING RISK & RETURNS –TIMING
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

15. MACRO PICTURE - TIMING THE MARKET
 Market timing is not promoted by BI
 Its very difficult to time the market, and…
 Quality growth companies will grow regardless of the market cycle
 They don’t drop as far in a down market
 They are the first to recover
 They go higher in the next market cycle
Timing

16. MACRO PICTURE - TIMING THE MARKET
 Growth Stocks (left) versus Cyclical Stocks (right)
Timing

17. MICRO PICTURE - TIMING ENTRY POINTS
Take advantage of market and
stock volatility when entering a
position or building a position.
Top Graph
 EW (grey), Biotech Sector (purple),
S&P 500 (green)
Bottom Graph
 RSI (indicates overbought and
oversold)
So What?
 Will biotech continue to outperform
the market? Where is energy now?
 Point out the entry points for EW?
Timing

18. IMPROVING AN EXISTING PORTFOLIO?
Sector
Size
Location
Timing
Reducing
Risk &
Maxing
Returns
 Determine Current Allocation
 Select a Target Allocation (company size/sectors)
 Where do you fall short (size/sectors)?
 Have a pounce list ready at all times
 Sell all the shares of poor performers
 Pare down overweight holdings of good
performers to get target allocation
 Buy more shares of existing companies, if they are
in the buy range, and needed for proper allocation
 Always be looking for better replacement stocks of
your existing holdings – you want best in class