Our patience paid off today, as our portfolio gained 0.7%, versus the market’s (S&P 500) rise of 0.3%. The relative outperformance isn’t the big deal in itself though…. it’s the fact that we more than doubled the market’s return while only being about 30% invested – the other 70% of our portfolio is cash. The more philosophical way of saying it is ‘reaping greater reward with less risk’. It’s easier said than done, and it’s not done all the time. But, that efficiency is one of the key underlying – sometimes unspoken – goals of this model portfolio.

In any case, the numbers prompt an update of the overall portfolio, as well as make a point we may as well voice now while the stage is set.

Here’s the current portfolio….

Portfolio - 11/03/09

And here’s our relative performance to the S&P 500 since the inception of the portfolio a couple of weeks ago….

Portfolio Returns - 11/03/09

As of today we’re beating the market again. However, ‘beating the market’ by virtue of not losing as much ground as the market is a dubious distinction. Yes, it happens, and I’m fully aware that it will happen from time to time with my model portfolio here. Nevertheless, a tolerance or expectation that it’s perfectly ok to let a portfolio deflate as long as you’re outperforming the rest of the market is a dangerous path to walk. Even a flat portfolio is more tolerable.

That’s not to say one should flinch every time the market trips, as most of those stumbles mean nothing. I’m not of the mindset that investors should ride all rough patches out, however. Some are ok to tolerate; others are too big to dismiss. If there’s one thing I’ve learned over the years it’s that not giving up ground is as important as gaining it in the first place.

As for the portfolio over the last couple of weeks, that was a dip I was willing to ride out so far, though it’s easy for me to say that – we had very little exposure. Had we been fully invested, I likely would have been more defensive. In fact, I’m still thinking defensively…. which is why I’m still hesitant to act on some of my newest ideas.

Bottom line? Even though we’re a ‘long only’ portfolio, we will act in ways that defend the portfolio from dips. Those small ones can become big ones pretty quickly.

As for some of the new possibilities on our watchlist:

• Insulet Corp. (PODD)
• Healthspring Inc. (HS)
• Idex Corp. (IEX)

We’ll look at them in detail if/when the need arises.