These portfolios started out as a long run risk taking vehicle that (hopefully) would grow and show the importance of investing. The average person has a net worth of zero (after you take into account debt on cars and mortgages) and has little cash in the bank. With these stock portfolios at least everyone has some core body of savings that they can use for investing or to purchase key capital goods (an initial house, a wedding ring). Now, for some of the participants, the portfolios have moved away from a long term risk vehicle to more of a generalized investment portfolio that should logically be slanted towards equities and higher risk since the participants are young but also has to take into account the possibility of a correction that could reduce equity values 25% – 50% for some extended period of time (years) like it did in 2008. You do not want to be in a position where you sell at a downturn and don’t stay in the market because you have to liquidate remaining stocks to cover necessary investments.
For some of the participants we needed to move out of individual stocks and into ETF’s because their professions make owning individual stocks more complicated. ETF’s, however, share the same mix of risk and return as underlying stocks and during the transition we’ve also shifted some of the money out of equity ETF’s and into CD’s and gold as a hedge and partial hedge.
Our current goal for portfolio one is to take some level of risk out of the portfolio and replace it with a combination of CD (get a return of about 1.5%), gold (generally holds more during a crash), or cash (if you need it in the next few months). Depending on the short term interest rate the brokerage account gives in the cash fund we may just choose to leave it in cash instead of CD’s.
Portfolio One is worth about $45k. We could take out $15k or so which would leave $30k in stocks. This is still a pretty high percent of stock for the market (about 70% equity).
Today we have 19 stocks in the Portfolio. If the stocks are not all correlated (same industry, US / Foreign) when you get to 10 or more, you have a reasonably balanced portfolio. We want to sell some stocks but keep a decent balance of what remains.
With Google Sheets we can see a real time look at portfolio in different manners through a series of linked tables without doing recalculations. Moving to sheets from Excel has made this process of analysis much easier. Also the beneficiaries of the portfolio can see these same metrics anytime with the most updated information.
The stock mix is currently about 60% US and 40% foreign (non US). It is good to keep some mix of non US assets in the portfolio since the US is about 25% of the world’s economy, and there is much growth overseas. Also, the US dollar has dropped about 10% vs. the world’s currencies in the last year (not what anyone expected, per usual, it is extremely difficult to forecast currency changes) so those foreign investments received a “boost” when translated into US dollars.
Another way to look at stocks is by dividend yield. A large part of the cumulative return in this portfolio (which has been reinvested) is dividend income, and Portfolio One earns about $1000 / year. Currently almost half the stocks in the portfolio give a “high” dividend of about 2.5% or more. While the predicted relationship between dividends and stock type (industry) generally holds true, with Information Technology stocks giving out smaller dividends and energy-type stocks giving higher dividends, this isn’t always the case. We should however at least consider the dividend earning elements of the portfolio when we make sales decisions.
Finally, the third part is industry. While almost all stocks (gulp) are near peaks, the information technology industry has grown faster in terms of stock prices and comprises 41% of the Portfolio. We likely should make a conscious decision to sell some of the IT stocks to diversify the portfolio a bit on this dimension; in any case we would not want to increase the concentration in this dimension.
For the individual stocks themselves, they go from about $1500 to as high as $5000 in positions. We usually start at a mature portfolio like Portfolio one at a value of about $1500 (because we don’t want more than 20 or so individual stocks, that’s too much to track) and the higher values represent stocks that have gone up that we haven’t sold (which comprise most of the total gain of the portfolio, along with dividends). For the newer portfolios we usually start in units of about $750 or so.
We probably want to use this opportunity to cull also some of the stocks that (we think) may be near their peak or have been hanging around not doing too much. These stocks include WIT, STO, and AEP. TSLA is probably one that we can think about exiting. That’s about $7k. Then there are some of the big ones that we’ve ridden up. We could sell half of TSM, PYPL, ITW, and CMCSA for about $7500 and give or take that’s our $15k or so.
I looked at capital gains under the new tax laws. Short term is taxed at ordinary income, which would be 22% or so in this portfolio. The long term capital gains would be at 15%. Usually we net “winners” against “losers” in sales (tax lost harvesting) but due to the bull market all we have is winners. Thus the impact of selling about $15k worth of stock from this portfolio is probably around $800 or so.