I got a great question today from a prospective subscriber regarding timing. He was wondering if it is too risky to buy the Top 20 Model Portfolio in its entirety today. While I can't answer that question (I have no crystal ball), I did want to share with everyone some perspective. Timing is always difficult, and the easiest answer I can give is do at least half now and then give yourself a fixed amount of time to get invested to a level that is appropriate for your own situation.
Now, what's my REAL answer? While stocks are up about 27% (from VERY depressed levels) this year, the Top 20 Model Portfolio is up about 67%. As you are probably aware, though, the 20 stocks in the model aren't up that much. We have shifted the names in the model over the year, and, as of 12/22, the median return of the current holdings YTD is just 7%. The average is up just 1%. In fact, the most any single stock is up this year is 54% (Timberland, which we owned at the beginning of the year and picked up again this quarter), while 7 (over 1/3) are down over 20%. I use a momentum gauge, and our portfolio was at just 0.11 (slightly above neutral). The S&P 500 is 1.0 (think of it as extended by one standard deviation from the mean), so we up less YTD and up less short-term.
All of that is for perspective. I have used my best judgment (the same one that has gotten us where we are) to set the portfolio up optimally. When I look at valuation, we have a median PE of just 14X (the S&P 500 is trading at about 15X 2010). Our portfolio, though, has MUCH better balance sheets. Most of the positions are in companies with cash in excess of debt. I also believe that our names are generally less cyclical than the overall market. So, while stocks could fall, I would expect our names to hang in better. I think we can do better in a flat to higher market, but we will most likely lag a big rally unless we make some big adjustments.
I hope that I have explained why I view the current model as safer than the market (lower valuation, better balance sheets, less cyclicality). In any event, don't come to the conclusion that because the model did so well this year that it is likely to "revert" in the days ahead. We are set up very differently today than we were a year ago. What pleases me is that we have been doing better than the rallying market lately (thanks Small-Cap) despite having better downside risk exposure. Let's hope it continues...