An Index-like Portfolio

The Portuguese stock market, as measured by the PSI20 index has been a disappointing adventure for investors. Apart from the odd up-turn now and again, it's been underperforming just about any other investment. However, this is no reason to presume that the tide will never turn. The 30-yearlong underperformance may well turn into decades of outperformance once the current mega-cycle comes to an end.

My guess is that it will be the Dow that heralds the end of the current mega-cycle, with the Dow/gold ratio going down into single digits. Once we see the ratio hit 4, I'll start rolling some of my gold into shares, and my plan is to buy Portuguese shares.

This is not likely to happen very soon, but it's never too soon to lay a plan, and my plan is to buy shares in the PSI20 index. I've made a spreadsheet for myself, where the PSI20's 18 components are listed with their respective market cap.

In doing this, I discovered that there are two companies that together represent more than 50% of the index. There are also ten components that represent less than 20% of the index, and some of the components are involved in businesses I don't have much faith in. The index is neither well balanced nor universally appealing.

The solution to this problem was for me to introduce a weighting function where I add weight to businesses I like and reduce the weight of businesses I don't like. The result of this is a weighted index which I can compare to the actual index going forward.

I have not bought any shares at the moment. I'm still looking for the current mega-cycle to end. But I don't have to wait for it to end to see if my stock picking is better than the index. I'll update my spreadsheet once a year to see how my weighted index performs compared to the actual index.

There's no point in following any of this very closely, so this is not some new hobby of mine. It's merely one new tool that I can use to judge objectively how my overall strategy is working relative to alternatives.

Wall Street

By Vlad Lazarenko - Own work, CC BY-SA 3.0, Link