Analysis: Positional Stocks - Portfolio Probe & Ge

Have you ever felt that your neighbor's new car enhances the value of yours, or a designer handbag boosts your influence at work? This phenomenon isn't confined to consumer goods; it's happening in the stock market too. Welcome to the realm of positional stocks.

Why Now?

The global economy is flooded with liquidity due to quantitative easing and low-interest rates. This environment encourages investors to chase certain stocks not just for their fundamentals but also for the status they confer, much like luxury goods.

Positional Goods: A Historical Perspective

Economist Thorstein Veblen introduced the concept of positional goods in 1899, noting that people consume goods and services not only for their utility but also to signal social status. Today, Apple Inc. (AAPL) is a prime example; its products aren't necessarily the cheapest or most functional but are aspirational.

The Appeal of Positional Stocks

Positional stocks often reside in growth sectors like technology and consumer discretionary. They command premium valuations due to their aspirational branding. Consider Microsoft (MS) versus Tesla; both are profitable, yet Tesla's stock is often more desirable for its association with innovation and sustainability.

The Other Side

While positional stocks can yield impressive gains when the narrative remains positive, they're vulnerable to sudden shifts in investor sentiment. For instance, AAPL's share price dipped in 2013 after concerns about slowing growth emerged.

Portfolio Probe: Examining Positional Stocks

To understand how positional stocks behave, let's analyze data from Portfolio Probe, a blog exploring investment strategies using random portfolios. Here are three positional stocks - AAPL, EEM (iShares MSCI EM Index), and AGG (iShares Core U.S. Aggregate Bond) - compared with C, a consumer staples ETF known for its stable dividend:

| Stock | 5-Yr Beta | 5-Yr Volatility | | --- | --- | --- | | AAPL | 1.23 | 0.47 | | EEM | 1.39 | 0.67 | | AGG | 0.64 | 0.08 | | C | 0.51 | 0.12 |

As shown, positional stocks tend to be more volatile and have higher betas than defensive stocks like C.

Positional Stocks in Your Portfolio

Incorporating positional stocks can enhance growth potential but increases risk. Here are three scenarios:

1. Conservative: Allocate 20% of your equity portfolio to positional stocks, focusing on established companies with strong balance sheets. 2. Moderate: Increase allocation to 30%, including some exposure to smaller-cap or emerging market positional stocks. 3. Aggressive: Boost allocation up to 40%+, but be prepared for increased volatility.