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Motley Fool Global Gains / GGT: Perfect Global Portfolio

URL:  http://boards.fool.com/i-view-the-basket-approach-as-a-psychological-tool-29291804.aspx

Subject:  Re: Basket cases? Date:  5/11/2011  12:22 AM
Author:  blaueskobalt Number:  133 of 151

I view the basket approach as a psychological tool recommended by the GG team to help safeguard us from the stress caused by the volatility of the Chinese microcaps (judging from the boards, it has not been very successful in that regard).

Mathematically, a 40% allocation to YONG as part of a basket designed to comprise 5% of a portfolio is no different than a 2% YONG position in the overall portfolio, and one is either comfortable with that or not. If not, one should either take a lower allocation or simply not own any at all. When it's put in a basket, it masks the volatility, but to what end? To trick one's self into feeling comfortable holding a more volatile stock than one is comfortable holding? That sounds like a recipe for disaster. If one is not comfortable holding a 2% YONG position, one should not hold a 40% YONG allocation within a 5% basket.

On the other side of the coin, I would not personally bother holding a 1% position in KO (i.e., a 20% allocation within a 5% basket). I want a (full) 3-10% position or none at all (or, if I want a basket with KO, I'll just buy a low-cost index)