We Ask Tom About His Portfolio Diversification
Transcript:
Easan Arulanantham:
So the first question is, this week, there was a change to the models? Um, so what does a diversified portfolio look like?
Tom Vaughan:
Okay, good? That’s a great question. We got this question earlier. So I’ve got some things to show you. But just in general terms, we had a fairly big change to the portfolios. This week, as we’ve kind of developed some different pieces. So really, there’s two main portions of a diversified portfolio that I consider. One is just this, you know, broad market, you know, owning kind of all of the stocks in the market to a large degree, and you control your risk by how much bond you have versus stock. But then also to kind of enhance rate of return, we look at these kind of investment themes, or what I call these targeted indexes.
Let me kind of share my current model, and that might be able to help you see, you know, what I’m talking about here. So this is the model that we currently have. This is our traditional model as a whole there, this is the stock portion of it, you can see there’s 15 little pieces in this pie chart. And so we just just step you through this, and hopefully you find this interesting and educational. But the first piece here is the vanguard total stock market index. And this is a great index and the fact that it owns almost every stock on the US stock market, it’s almost 3600 different holdings. And so that’s kind of the start spot. So to a certain degree, we own every single stock in the market. And then every other piece is sort of a concentration on certain areas.
So for example, the next piece here is the s&p 500. Now, that’s already in the total stock market index these 500 stocks, but this is, you know, the theme behind the s&p 500 investment is all about the fact that this particular index is super popular worldwide, and hasn’t really good track record long term. So that’s the second piece. And then the next eight pieces here have to do with the main theme, one of the two main themes that I’m really focusing on right now, which is really just the reopening. And so if you look at the reopening, you want to look at the companies that struggled when we had to close everything down, because they’ve cut back on their, you know, costs. And so as the economy reopens, and the vaccine gets out there and what have you, we should see some better gains coming out of these categories. So the first three pieces here are all it says pure value. And so this is the S&P 500. So it’s that right, but it’s just the pure value stocks.
And this is the S&P Midcap 400 pure value S&P Smallcap 600 pure value. And so again, these are all in these first two pieces. But what they’ve done here is just segment in this case, Invesco has segmented out from the S&P 500. Just those companies that are pure value stocks. And so again, just to reiterate, value stock is something where the price compared to the earnings is fairly inexpensive as compared to say, a growth stock, where the price is fairly high compared to the earnings and growth stocks, you’d expect to be able to continue to make money because the company continues to grow really fast, and a value stock you’re looking to buy low and hope that it turns around. And so a lot of the companies what were called Epicenter stocks, the companies that got affected by the virus or in this value category. And so that’s where that’s why this is here.
And then consumer discretionary is another area that we’re seeing some really explosive growth come out of. And this is just consumer spending money. And these are the companies that are in that category for consumer spending on a discretionary basis that are in the S&P 500. There’s 62 of them. So you know, for example, Amazon, you know, reported earnings that a 44% increase in revenues, that’s part of the scoop, consumer discretionary, but you got companies like the gap and Ultra beauty. And so as people get back to work or get back out into you know, spending, we’re seeing some pretty good growth in revenues, a lot of these companies, leisure and entertainment has really been shut down travel restaurants would fit into here, live entertainments, and all those types of things. So theoretically, again, as things reopening, we should see some real good growth here.
And then regional banking, as the economy reopens, it pushes interest rates up. And banking does better when interest rates go up like that. And so we’re seeing some good gains here. Transportation again, as things reopen, we’ll should see higher spending that means product will move around more ups, trains, those types of things, and then people will move around more and that’s where like Avis and Uber and Lyft and such fit into that semiconductor. Another area from the reopening, you know, as things have come, you know, online here, boy semiconductors are running flat out and we actually have a shortage here. So those eight pieces are all part of the reopening play and theme so to speak.
The other pieces center left here, the other five are really part of kind of the government spending theme that I’m looking at very closely right now. And so we’ve got, you know, money going into infrastructure. cybersecurity is a really big focus right now with this particular administration, Smart Mobility. This is where you see the electric vehicles and charging stations and those types of things. This is the technology side of infrastructure. So it kind of goes here with this. And then we’re seeing a pretty good growth in the exponential technology, really, again, companies that are going to benefit from some of this government spending. So that’s, that’s what’s happening right now as far as the mixture goes, and our main themes as far as that goes. So it’s really I’m very excited about that. But the idea behind a diversified portfolio development is start with kind of the broad market and then figure out what parts you want to kind of overweight as far as that goes. And that’s where these little theme and targeted indexes come in. So that’s that’s what we’ve got there