finance

Stock-Trak Report

Summary of Investment policy

Risk: Risk Averse

Time Horizon: Long-term

Portfolio Selection: Cash, equities and bonds

Shortw-term liquidity need: Yes

Portfolio Selection Rationale

According to modern finance theory, an efficient portfolio earns highest expected returns under certain risks and has lowest risks under certain expected returns. Because I am risk averse, my expectation is to beat inflation. I only invest 32% of money in equity and bond market. My portfolio includes 68% of cash, 21% of S&P 500 ETF (SPY), 8% of Vanguard bond market ETF (BND) and 3% of Antero Resources Corporation (AR).

For equity investment, I mainly follow passive investment strategy. S&P 500 index ETF (SPY) is to replicate performance of S&P 500 companies. This index composite is a well-diversified portfolio and widely used as a relevant benchmark for portfolio evaluation. Therefore, this ETF can be regarded as market portfolio, which only takes systematic risk. I choose ETF over the index fund is because ETF can be traded like common stocks.

I also invest in Antero Resources Corporation (AR) because this company has solid financial strength and is underpriced due to tumbled oil price. The profitability ratios are quite strong. The gross margin of AR is 96.73%, which beats average gross margin of its peers (39.12%) and outperforms its industry average gross margin (39.12%). Also, the net profit margin of 17.16% is much higher than -57.63% for peers and -28.79% for industry average. In addition, according to Yahoo finance, the average 1-year analysts’ forecast for AR is 31.73, which indicates the current stock price is underpriced. According to Stock Trak, Consensus Rating for AR is moderate buy. Among 20 analysts that covers AR, only 1 analyst recommend sell; 10 analysts recommend hold; and 12 analysts recommend buy.

For fixed income investment, I also follow passive investment philosophy. Vanguard Total Bond Market (BND) seeks the performance of a broad, market-weighted bond index. The fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Index. This index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities-all with maturities of more than 1 year.

Performance Evaluation

Table 1

The market value of my portfolio is 1,006,868.81. The return of my portfolio is only 0.69% because I hold almost 68% of money in cash. The return of S&P 500 is 1.24% which is our benchmark index. Therefore, my portfolio underperforms market. The return of AR is 3.31% and the return of BND is 0.74%. The equity and fixed income portfolio (excluding cash) returns 1.29% (65.33%*1.24+25.82%*0.74+3.31%*3.31).

Mistakes and Lessons

My portfolio is aligned with my expectation. However, my total portfolio return is low because I only invest 32% of money and hold 68% of cash. The Stock-Trak portfolio simulation is quite challenging and interesting. I have learned a lot from this practice. I am too conservative to manage my portfolio. If I redo this portfolio investment with my actual money, I would hold market portfolio, investing all money into S&P 500 ETF.