Stock trak free essay sample

Looking back the investment scenario, I notice my client who is a 35-year-old, unmarried childless male with $150,000 income and $50000 savings per year. Since his risk aversion is characterized as moderate, the portfolio ought to be â€Å"moderate† correspondingly. The first fundamental investment decision is Assets Allocation. Since that the assets allocation is the most important determinant of portfolio returns, before investment, I made a primary allocation: 35%-40% equity (including ETF), 30%-35% mutual funds and bunds, 10%-15% options and futures, 15%-20% cash. When it comes into reality, I found it is hard to exactly follow the assets allocation planed at the beginning, since the market trends is hard to predict with high uncertainty, the financial market might has a big difference with we expected at the planning period. In that case, according to the market trends I expected, I changed a little in my portfolio allocation within a small range. The second investment decision is Securities Selection. At the beginning, with little knowledge about the stock market, I made some irrationally invests, because I didn’t follow closely to the financial news of the companies and market, therefore, I often missed the best time to buy and sell and the portfolio value steadily declined at the first a few weeks. From this experience, I realized that the significant roles of investing rationally. Making every rational decision is extremely hard, because it is difficult to predict the future performance of the stocks, because the stock market follows the random walk and there is a high uncertainty of the future returns. The stock price is not only affected by internal reasons such as the performance and revenue of the company, it also can be affected by many different outside factors such as the economic trends, demand or new policy, which can instantly manipulate the up and down of stock prices regardless of the internal causes. Hence, to perform well in the portfolio, it is not only essential to apply appropriate investment strategies, but analyzing current market trends is also significant. Recent financial reports and current news, they are the important barometer of the stock price. From then on, by following closely to the current event and analyzing the financial report, I’m more familiar with the stock market and less irrationally than before. Furthermore, since Stock Trak Simulation was a short-term investing project with moderate-risk investors. I decided to choose some stocks which provide above-average return and whose prices have the potential to increase from different industries. Via analyzing P/E Ratio, I chose some value stocks which are equities with generally lower P/E ratio than average (the average P/E ratio of the SP 500 a year ago is 17. 21) i. e. value stocks. And the Betas of the stocks should be relatively moderate. Considering that my portfolio market value ranks in second place (2/27) with the 9. 25% return and total equity was $547,597. 39. At the first glance, I would assume that I were pretty successful and used the money well. However, there were many dips and recessions in my portfolio. For example, the market value was as low as $466,516. 75 on March 7 and as high as $562,585. 34 on March 14. Moreover, since the irrational investments I made at the beginning had a massive negative impact on my portfolio and lost a large amount of portfolio due to lack of diversification. As the portfolio value graph shows, it dropped steeply from March 5 until March 7, I did more research and thought clearly before buy or sell any stocks, from then on, with the bloom of the stock market, the portfolio value increased sharply to peak value $562,585. 34 on March 14 finally mitigating fluctuated until the project closed. The following are some specific examples in this simulation: Ford Motor Co. (F), Modine Manufacturing Company (MOD), Schlumberger Limited (SLB) When I looked at a piece of news from The New York Times on Feb 22 which tells that The Obama administration, seeking to promote domestic manufacturing, proposed Wednesday to offset new tax breaks for manufactures by raising taxes on a wide range of other company,2 I expected the prices would go up because of the tax benefits to manufacturer firms. However, the information given can sometimes be misleading and obvious choices based upon such information may not always be what I expected it to be. I invested a huge amount of money on manufacturer and related industries’ stocks, such as: Ford Motor Co. (F), Modine Manufacturing Company (MOD), and Schlumberger Limited (SLB) when I thought they would have a bright future due to the new proposal. Considering the high percentage of the manufacturing companies stocks in my portfolio, obviously, I didn’t well diversified my portfolio, which really hurt the total value because those stocks were supposed to be stable but ended up doing the opposite . From this experience, I learned how important the well-diversified portfolio is. Given the principle of diversification, holding the huge number of stocks in portfolio is not well-diversified, whose minimum average annual standard deviation is roughly 19. 2%, which due to the Nondiversifiable risk. In that case, I diversified as best as I can by investing in stocks, ETF, mutual funds and derivatives from different areas to mitigate the risk. Liz Claiborne Inc. (LIZ), Apple Inc. (AAPL), MagnaChip Semiconductor Corporation (MX), The Bank of New York Mellon Corporation (BK) and Fomento Econ (FMX) Once I changed my strategy to combine technical analysis and fundamental analysis, I based tractions on basic technical analysis chart via yahoofinance. com, using some indicators such as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), analyzing Moving Average and Exponential Moving Average (EMA) from chart. Relative Strength Index (RSI) RSI is an indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset, which ranges from 0 to 100. An asset is deem to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalues and is a good signal for assets pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. 3 Generally, if the RSI rises above 30 it is considered bullish for the stock. Conversely, if the RSI falls below 70, it is a bearish signal. Liz Claiborne Inc. (LIZ), Apple Inc. (AAPL), MagnaChip Semiconductor Corporation (MX), The Bank of New York Mellon Corporation (BK) and Fomento Econ (FMX) examples are how I learned from RSI analysis. More specifically, it showed that in March 22, the RSI of LIZ reached 40 for a brief moment to considered bullish, and I purchased the LIZ around $11. 80 and sold them at $13. 41 on April 17, and the RSI stands roughly 50 recently. Moreover, the company expects to see some improvement in Juicy business with the introduction of the new merchandise in the spring collection. The value line estimate the LIZ will earn about $0. 15 a share in 2012. 4 The RSI of the stocks which I have mentioned before are all above 30 and the results came out well so far. Moving Average Convergence Divergence (MACD) MACD is one of the simplest and most reliable indicators available. It uses 26-days EMA and 12-day EMA, which are lagging indicators. A nine-day EMA of the MACD, called the â€Å"signal line†, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. Generally, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely t experience upward momentum. 5 The AAPL example above is how I learned about the MACD analysis. It tells that in March 7, MACD rose above the signal line, giving a bullish signal, I bought the AAPL at $534. 14 and sold at $583. 92 on March 16, it turns out that I gain a lot from AAPL, but still I sold them too early. Diversification Option Analyzing that the AAPL price would increase in the near future, I purchased the call options to diversify my portfolio. And I knew this project is a learning tool, which let all the students be familiar with the all kinds of securities, I was not afraid to make mistakes and try different securities. The result turned out pretty well that I gained approximately 183% from AAPL1217C540. (Purchased at $14. 15 and sold at $41. 88) Mutual Funds Given the low interest rate, it is not a wise decision to purchase bonds, so I turned to mutual funds to diversify my portfolio. I bought Delaware Pooled Trust the Cap Growth Equity (DPLGX) and Columbia Strategic Income A (COSIX). The DPLGX belongs to large growth funds, which is ranked four-star by Morningstar Rating with Year-to-Date return 16. 08% and 0. 22% Yield. The COSIX is a Multisector Bond with medium interest rate sensitivity and low credit quality, which ranks three-star by Morning Rating with 3. 76% Year-to-Date and 5. 17% Yield. What I found from mutual funds is that it not as volatility as stocks, which effectively decrease the risk of the portfolio. The value of mutual funds I bought often go up when whole stock market is bearish and decline when stock market is bullish. With the help of the mutual funds, my portfolio returns fluctuated slightly around 9% to 11% though the return of the mutual funds around -2%. ETF Since there was such volatility in the stock market and my overall return was over 10%, I start to invest in low risk securities, such as Vanguard Total Stock Market ETF (VTI), which are large Blend Exchange Trade Fund bases on total stock market. Portfolio Performance Analysis My overall return is 9. 25%, which is over average and is over performance comparing to the SP 500 1. 98% during the same period. The sharp ratio is 1. 84 a little above the average, which is a risk-adjusted measure to determine reward per unit of risk. Obviously, the higher the sharp ratio, the better the portfolio’s risk- adjusted performance. Summary By managing the portfolio, I have acquired a lot new knowledge of investment strategies and become more familiar with the trade market. Firstly, the proper assets allocation is so important that we have to pay more attention to it and make securities selection in term of the horizon, income level, risk toleration, and returns in the future of investors. Secondly, analyzing the historical data and financial report, paying close attention to the related current new and market trends, using RSI, MACD and EMA indictors to examine the performance of the securities, being familiar with investment strategies and making rational decisions help investors to manage the portfolio. Thirdly, ignoring common judgment errors, such as loss aversion, regret aversion and sunk cost fallacy.