You know it's a bull market when QBE Insurance (ASX: QBE) reports a loss of US$254m, yet it's shares jump 3.8%.
You know it's a bull market when Qantas Airways (ASX: QAN) shares are up 13% so far in 2014, despite the troubled airline being set to announce a large six-month loss and plans to shed thousands more jobs.
You know it's a bull market when the ASX is hitting 2008 highs, slowly, surely but decisively, putting the GFC well and truly behind it.
You know it's a bull market when in London, the FTSE 100 rises to its highest level since December 1999, a time when the UK was in the grips of a full-on dot-com bubble.
You know it's a bull market when in New York the S&P 500 rose to a new all-time record high, and Drew Wilson of Fenimore Asset Management in Cobleskill told Bloomberg… "U.S. equities can go higher in 2014… I believe the fundamental recovery is real…"
You know it's a bull market when I receive an email from one organisation forecasting that the S&P/ASX 200 Index will hit 15,000 within the next five years. Interestingly, last year I received one from the same organisation predicting a 90% market crash. The ASX 200 Index is currently sitting around 5,450 so would need to virtually triple to reach that target.
Buffett gifts investors with more pearls of wisdom
Should that theme play out, one of the simplest and cheapest ways of playing it is by following Warren Buffett's most recent advice. As Buffett wrote yesterday in an extract from this year's upcoming letter to Berkshire Hathaway (NYSE: BRK.B) investors… "The goal of the non-professional should be to own a cross section of businesses that in aggregate are bound to do well. A low cost index fund will achieve this goal."
What could be easier than buying an index fund covering the ASX 200, such as those offered by Vanguard or iShares? It won't go broke, and you get the benefits of owning 200 companies, all of whom are pulling your portfolio along for you. If you want to match the market return, there's nothing cheaper or easier, and certainly beats the pants off most 'active' fund managers.
Warren Buffett is even eating his own cooking. One of his bequests in his will sets up a trust for his wife. His advice to the trustee is to put 10% of the cash in short-term government bonds, and 90% in a very low-cost S&P 500 Index fund. As he says… " I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers."
Speaking of a portfolio of quality businesses….
How would you feel if a professional stock picker or fund manager had to critique your portfolio of stocks? Embarrassed? Looking at some of the stocks I hold, I know I'd be a tad nervous. For one, there's Red5 Limited (ASX: RED), a gold mining stock I purchased at $1.56. Unfortunately, for both me and the company, the share price is now wallowing at just 11 cents.
Or would you be confident it would stand up to scrutiny? Well, I'm here to help in that respect with a very simple exercise that could change the way you view investing and your current portfolio.
As you are probably aware, The Motley Fool suggests investors follow a pyramid investing style. And I don't mean investing in pyramid schemes.
With the base of the pyramid being made up of core stocks, growth stocks on top of that and speculative stocks making up the splash at the top of the picture above. Here's an interesting and potentially eye-opening exercise. Go through your portfolio and label each one of your stocks core, growth or speculative and then add up the total value for each of those three buckets.
The major banks, Wesfarmers (ASX: WES), Woolworths (ASX: WOW), Insurance Australia Group (ASX: IAG) and companies like Telstra Corporation (ASX: TLS) would most likely be core stocks.
Examples of growth stocks might be REA Group (ASX: REA), Carsales.com (ASX: CRZ), Seek (ASX: SEK) and 21st Century Fox (ASX: FOX).
Hint: If the company produces gold or has never made a profit — it's speculative.
Then divide each total by your total shares portfolio to give you a percentage. To give you an example, my SMSF has 46% in core stocks, 49% in growth stocks and 5% in speculative stocks. With more than 20 years until I retire, I have a large allocation to growth stocks.
If you have a low value for your core stocks, or a high value for speculative stocks, that may give you an insight into where your next stock buys and sells should come from. If you are nearing or in retirement, having a large percentage of your portfolio in growth stocks may also not be a great idea. It could also improve the performance of your portfolio, generating you higher and more consistent returns.
I'd be interested to hear what you think of doing that little exercise — email me at [email protected]
