Introducing the New IU Model Portfolio

As I've chronicled on this site, I've tried to bring you up to speed on my investment activity in a transparent and honest way. I'm making some moves here, so it's time to update this activity.

For IU's latest Market Report (registration required), I did weeks of research to figure out how to be positioned. This included listening to what some of the top pros have to say, screening hundreds of stocks for interesting ideas, and looking at some "safe" and solid mutual funds. I do this not only for you, the readers, but also for my own investment activity. I practice what I preach!

In the conclusion of my report, I generated some ideas of a model portfolio. I'll update monthly. (Disclosure: I generally follow the model portfolio in my own investing.)

It was fun sharing my personal investment approach with you last year, but now it's time to make it a regular feature.

This will allow IU to do several things:

1. Find a way to implement the success of the great IU25 Index, which is built to find the highest-quality, fastest-growing reasonably priced companies. Since the index was launched in April 2011, Apple has been the largest component, because it showed well in our value formula.
2. Give investors a long-term, disciplined approach that will help them filter out some of the emotions of investing.
3. Beat the market, hopefully!

Before I move on to the new model portfolio, in the interest of transparency, let me explain what I'm doing with my own investments before I transfer them in entirety to the new model portfolio.

• Going long Jeffrey Gundlach: I was so impressed with a recent Jeff Gundlach presentation that I bought the DoubleLine Total Return Fund N (DLTNX). As I mentioned in the Market Report, the DoubleLine funds managed by Gundlach outperformed 98% of their peers last year. Gundlach has an incredible track record, and he is a unique thinker.

  The Doubleline Total Return Fund N is a bond fund that has an annualized return of 10% in the last year and a dividend yield of 8%. It has low exposure to Treasury bonds, the area of the bond market that looks the most suspect. I chose to park some cash here for the yield -- pure and simple. I trust Gundlach not to botch things up. Though this fund has some exposure in a down market, it should crank out the dividends nicely to help balance the portfolio.

• Buying (more) gold: I have owned gold since 2004 in some form. This week, I feel that gold is making another significant bottom, so I'm adding to it. As detailed in the Market Report, Marc Faber's asset allocation says that gold should be 20-30% of the portfolio. That is aggressive, but in a monetary inflation environment, if you hold no gold, you risk underperforming both the market and inflation. Just as an example, stocks went nowhere last year, but gold climbed 11%. The recent $100 correction is a gift.

  I added to gold in the form of the mini-sized gold futures, which trade on both the NYSE LIFFE and Chicago Mercantile Exchange (CME) Globex markets. The two contracts represent 33- or 50-ounce increments. A new E-micro futures contract introduced by the CME represents only 10 ounces, making gold futures more accessible to the average investor. You would need a futures account to buy these.

  For the purposes of tracking, we'll represent gold in the model portfolio with the spot price.

• Buying (more) gold mining stocks: Even though the price of gold is up about 20% from a year ago, gold mining stocks have just been crushed in the last 12 months. They are now incredibly cheap in relation to the gold price. I recently bought Newmont Mining (NYSE: NEM). I have held Royal Gold (Nasdaq: RGLD), a very solid stock that pays a nice dividend, on and off for many years. It has been a top performer.

  If you've never been involved in precious metals and you want some general exposure, a precious metals fund I recommended in the Market Report is Invesco Gold & Precious Metals (FGLCX), which I also own. It has averaged 11% a year over the last five years.

• Other items: You may recall that, as of late December, I owned some of the ProShares Short S&P 500 (NYSE: SH) as a hedge. I was forced to cover half of that position on the uptrend this year, but I still own half. I'll keep that position with a stop at S&P 500 level 1,380. I have this strange feeling I'll get stopped out, but if the market hits new highs, I'm not going to complain.

  In the model portfolio, we are not going to hedge with shorts, because this is difficult for the average long-term investor.

  I still hold Proctor & Gamble (NYSE: PG), which I'll probably never sell. Literally. I'm up about 11% after acquiring it during the market swoon last summer, and it pays a 3% dividend. I like solid dividends, and this is considered one of the safest stocks, so it's a long-term core holding.

With that out of the way, let's set out to build the new IU Model Portfolio, which will start out with allocations to most of the positions I mentioned above. I am also buying Dell (Nasdaq: DELL). Why Dell? I want some technology exposure. The company is a turnaround story in progress, and it has excellent fundamentals and loads of cash.

I'm going to make our portfolio a nice, even $50,000. Of course, if you want to follow this model at home, but you don't have $50,000, you can invest in a small proportion.

Overall, the portfolio is about 10% bonds, 20% equities, 30% gold, and 40% cash. This is close to mimicking the allocation that Marc Faber had recently, but with less of an equities allocation. I do need to increase the stock allocation, but I am nervous about doing that after such a big market run. The stock portfolio is pretty conservative. They are all fairly low-beta (less volatile) stocks with attractive dividend yields.

IU25 Index

Table 1: IU Model Portfolio -- Initial Holdings

Holding	Symbol	Price 3/8/2012	Amount	Value	Yield
Doubleline Total Return Fund N (DBLTNX)	DBLTNX	$11.20	500 shares	$5,600	8%
Proctor & Gamble	PG	$67	50 shares	$3,347	3%
Newmont Mining	NEM	$56.75	50 shares	$2,837	2.40%
Dell	DELL	$17.23	200 shares	$3,446	1.40%
Spot Gold		$1,690	10 oz.	$16,900	N/A
Invested Total				$32,130
Cash				$17,870
Portfolio Total				$50,000

What's our strategy?

• We'll dollar-cost average in by buying new things every month or so.
• If the market corrects more dramatically, we might get more aggressive with the stocks we really like.
• I'll update this monthly.

If the market does back off, I'll be getting out Investor Uprising's latest shopping list, as described in the Market Report.

(Disclosure: As of this writing, the author owned gold futures and physical gold, Newmont Mining (NYSE: NEM), Proctor & Gamble (NYSE:PG), Royal Gold (Nasdaq: RGLD), and DoubleLine Total Return Fund N, among other holdings. He has plans to acquire Dell (Nasdaq: DELL). Positions can change at any time.)