How I set up my Variable Portfolio (70% return over last 3 years)

[MiniB]

Currently I treat my entire portfolio as a variable portfolio but I am making moves to transition half of my portfolio in PP over the next month.  I will keep my VP isolated.

Here's what I like to do with my VP that has achieved 70% return over the last 3 years.

I run at 80% Stock 20% Cash.  The cash is there to have something to rebalance into Stocks in the event of a downturn.  Also if stocks do super good, I "lock in" gains by selling into cash portion.  I rebalance at 5% bands so Stocks should be 75% to 85%.  The exact mix of stocks I like to speculate with.  Currently I am 80% Europe for the last 2 months and have been killing it.  Prior to that I was 80% REITs for about 16 months and realized ridiculous gains.  I like to speculate into things that have performed very poorly recently.

The real secret to my 70% return was luck.  In 2008 I was 50% stock and 50% cash. I was planning on using the cash for a home downpayment.  Not only did I get lucky in NOT buying a home at that time, I got lucky in not being in stocks.  When I decided home ownership was going to wait several years, the stock market had crashed 30%.  So I went 100% stocks, since I didnt "need" the cash anymore, and by doubling down on my losses in the half that was stocks, I would only need half as much of a return to break even.  I also knew the government wouldnt allow banks to fail.

I literally caught the exact bottom of the market by one day.  As the market rose, I started pulling out stocks into cash.  I went from 100/0 to 80/20 over about 6 months.  I didnt want to be too greedy and wanted to lock in some gains, and also have cash available in case of a double dip crash.

During this time I also shifted my equities into almost all REITs since they were down so much, and I knew the new President would be more than willing to throw as much money into mitigating the real estate market as possible.  I got 100% return on those REITs over a little over a year.

Then about 3 months ago, people were freaking out over Greece.  I knew the EU wouldn't let Greece fail.  Also, I had gotten 100% returns on REITs and was scared they were rising too fast.  So I shifted my positions into Europe.

Another amazing move I made, was about 18 months ago or so, Muni bonds were getting hammered, because hedge funds were forced to liquidate in order to cover short positions on treasuries.  I made a 5% return on a chunk of Munis (in an ETF) in one week.  I basically got in 2 days before the Wall Street Journal was reporting on a once in a life time arbitrage opportunity, where hedge funds dumped so many Munis onto the market, the arbitrage took two weeks to occur rather than 2 minutes.  That was a once-in-a-lifetime opportunity and I actually bet half of my portfolio on it.  I could have made a 10% return if I held onto them another few weeks but I was thrilled with 5% in one week, and was not psychic.

I guess the overarching theme of my investing strategy has been to make bets on things that are hurt hard, and will likely receive government intervention.  You may ask why I only got a 70% return over this time?  Well since half of my money was stocks in 2008, I lost 20% of my portfolio.

Also I used to think speculating in individual stocks was a good idea and I lost a few dollars to Sirius stock, basically I was catching the falling knife on it's way down.  I also lost some money betting against treasuries.  Overall I did pretty good and my new fundamentals are to use Index funds only.

I'm thinking of keeping the VP active as half of my portfolio now, putting the other half in PP, and then putting all forward contributions in PP only, completely isolating my VP so as I age, it becomes less and less of my overall portfolio.  Or I will make such a killing in it, that I will retire early.

[craigr]

You are doing what I call "Vulture Investing" (aka. value investing). Wait for really bad news and assess the fundamentals. If the markets are overreacting then go in and feast on the carcass. Has risks of course, but when it works it can really be profitable. I think that doing this with the indices as you did is safer than individual stocks. Although I admit that last Spring I did buy some shares of BP at the height of the oil spill coverage. I didn't think BP would be going anywhere and there was also that govt. dynamic you point out (there is little chance the UK govt. is going to let BP go under).

Maybe we could call this "Too big to fail" investing instead?

[MediumTex]

Maybe we could call this "Too big to fail" investing instead?

TBTF investing also has its risks.

Lehman Brothers
Bear Stearns

Other gigantic companies have also disappeared (or otherwise consumed investors' capital):

GM
Circuit City
Worldcom
Enron

Be careful.  The index approach is a good idea for this style of investing.

[craigr]

Maybe we could call this "Too big to fail" investing instead?

TBTF investing also has its risks.

Lehman Brothers
Bear Stearns

Other gigantic companies have also disappeared (or otherwise consumed investors' capital):

GM
Circuit City
Worldcom
Enron

Be careful.  The index approach is a good idea for this style of investing.

Definitely agree with you there. Using an index is the way to go if you want to try this in the variable portfolio. Bad news is often contagious and will affect the entire index to create good speculative buying opportunities.

[Storm]

Interesting investment choices.  You definitely have a knack for taking the emotion out of the buying process and buying in when things look the darkest.  That is when most investors let fear run their decision making process.

I just wanted to point out that there is a lot of risk in this approach.  Like, for example, your muni bonds - they might have paid off handsomely, however, you might have also had some municipalities default or go into receivership and you might have lost half your portfolio.

Another thing to mention is that if you just would have gone long gold, you probably would have seen similar returns.