More Portfolio Thoughts

In regards to my recent post “How Many Positions Should You Have,” one reader had this question:

How should we view our “Portfolio” when we have several accounts (i.e. 401K, IRA, Broker, etc)?

Should all be considered one portfolio or separate? Would a single 8% position equal 8% of the total of all accounts or would it be for a single account? This question is related to the total number of positions and position size.

While there is certainly not just one way to handle this, my preference is to look at each account separately. For example, if you have a $100k IRA, then you should allocate as per this portfolio value. If additionally, you have started a small Roth-IRA worth $7k and a brokerage account with $25k then look at these as separate entities. A small account may only justify being invested in 1-2 mutual funds/ETFs, while a larger one should obviously be more diversified.

Along a similar theme, reader Ralph had this question:

I am interested in a hedge for my IRA and taxable accounts. How do you determine how much to buy of a fund like SH or SDS? Would it be best to buy the hedge (fund) in the taxable account to cover both accounts? For example, I have 150,000 invested in the taxable account and 500,000 in the IRA account.

Thank you.

Again, there are many ways to approach this. Let me give you an example of how I have handled this in my advisor practice. Towards the end of the last Buy cycle, we were invested in 2 widely diversified domestic mutual funds with a total 20% portfolio allocation.

I purchased 20% of the short S&P; 500 ETF (SH) to cover those positions. You’d think that this hedge now would cancel out any gains or losses on either side. That did not happen so far.

During the past 10 days, and the drubbing in the financial markets, SH has gained more in value than the mutual funds have lost, giving us a gain of over 1% on the invested amount during that time.

Whether you use SH, or the 200% turbo version SDS on only 50% of your positions, is a matter of preference. In any event, I would treat both accounts as separate entities. As time goes on, I will comment more on hedging strategies as they apply to mutual fund/ETF investing.