Introduction:

After writing my previous article on Risk Management I received some questions about how I use it and how successful it is. So I thought that this, my next article, could address some of those points and could be used to show you a "model Portfolio" likened to those seen at hedge funds and large mutual funds.

To start with this isn't really a set and forget portfolio where I am setting out to achieve high yield via dividends, or protect my capital with low beta investments. Instead in this it requires daily monitoring and constant buying and selling of various securities.

Portfolio:

As mentioned in my previous article, I split up my portfolio into different areas defined by Percentages of total account value, as seen below.



DJIA - 25%
US 5YR - 15%
Gold - 25%
USDJPY - 10%
US 10 YR - 15%
High beta - 10%

I will go through each section and show why I have these and why their weightings are as such.

DJIA - Dow Jones Industrial Average:

This basically contains 30 of the largest companies within the US which is indexed. There are many ways to trade it from owning individual stocks within it or trading forms of derivatives such  as Leveraged ETF's or Futures contracts.

Personally I have my 25% in Futures contracts with which I can easily liquidate my positions and as oppose to trading 30 stocks, I can trade just one security.

With this segment I don't just buy and leave it, I actively day trade YM, DJ and DD. The 3 Dow 30 futures contracts on the CME. For example, I will have a long Bias but I will sell when I think the market is overextended or due for a fall as seen in recent weeks. Basically with this, my aim is to buy the long term dips.

Long term Prediction : weighing hugely on whether there is further QE, if so - 13,000 at least, if not - 10,000.

US 5YR / 10YR bonds:

In our exceptionally low interest rate environment, holding these bonds is not about the yield - 0.71% and 1.63% - it is more about the price of the underlying asset.

Like before it can be traded in many different ways, from buying the actual note from the US treasury to futures contract. Of the 30% I hold to bonds, 15% is done holding actual bonds. I do this mainly for the security of this capital. 

The other half is primarily done by trading the security on the CME. In recent weeks this has seen an explosive rise in its price and as such I have sold many of my contracts. Any pull-back I will be looking to long though.

*Chart form Bloomberg


Long term prediction : Yields could still fall to new lows with heightened risk from Europe and China. Therefore Yields could fall as low as 1.25% on the 10 YR.

Gold:

25% of my portfolio is tied up in Gold, I do this to hedge exposure to inflation risks and for the fact that further monetary easing from worldwide central banks is expected and Gold will benefit hugely. 

The primary way is via bullion and physical gold, but due to difficulty to actively buy and sell, and the fact there is a premium over spot prices, I prefer to trade futures and spot Forex gold. It is easy to buy and sell this way and I can benefit from rises and falls using leverage.

As before I don't just buy and leave it, I do sell when I think it is overvalued in the short term and buy the dips.

At the moment Gold is primarily trading with the Dollar and as such I prefer to Buy gold in different currencies such as AUD, EUR and GBP.

Long term Prediction : I see Gold eventually reaching $2,000/oz. But we could fall further in the short term.

USDJPY :

I'm sure many of you forex traders query this move, but for me I see the JPY extremely overvalued and the damaging effects of it on Japan's exports will finally make the BoJ do something serious. On top of this, Japan is no safe-haven in my opinion. High levels of Debt and little growth doesn't seem great to me.

As seen in recent months, the USDJPY is mainly led by Yield differentials between US and JGB's.
This partially hedges my Treasury exposure, but I also think that USDJPY could move a lot higher without rising yields.

This section is done with leverage. USDJPY takes a lot to move 10% whereas Gold or DJIA can move that easily. Therefore I tend to use 5:1 leverage on my Long USDJPY position. 

I only started accumulating this position last summer when it was stagnant for many months. I do sell some of my trades, and did such during the rise to 85 earlier this year. 

*Chart from Bloomberg

Currently I am building longs below 79.00 and 80.00,

Long term prediction : I see USDJPY reaching 85.00 this year and possibly even 100.00 in the upcoming years.

High Beta stocks :

This is the most vague section, I trade stocks with Dividend yields greater than 5%, I try to get low P/E stocks in the defensive or non-cyclical sectors. This is probably the most time-consuming section of my portfolio as It requires constant monitoring of many stocks. Because of the yield of these stocks they tend to have a Beta greater than 1.

Thankfully with great advances in analytics's stock screening saves many hours and helps enormously. 

I am not going to disclose what Stocks I own individually but At the moment from the 10% I allocate to this section 80% of that is Cash. An index which roughly correlates is the iShares High yield ETF, ($HYG) This holds stocks with high yields (7%+) and shows how they act as a whole.

*Chart from Bloomberg

This shows how HYG (Orange) and DJIA (green) are highly correlated; Meaning my sentiment for one is almost identical to that of the other.

Conclusion : 

Hopefully, this article has shown you how I conduct trading my portfolio and my steps when using it, As it stands about 25% of my account is cash and the rest is distributed between the others.

Finally, I hope this has helped you if you are planning to create a long term portfolio,.

Many thanks and good luck.

Adrian.