As you know already, I publish a monthly update of my pension plan portfolio. The idea is to show you, month after month, how I manage my own money using my investing strategy. A long-time reader sent me an email asking me to project my portfolio in the future. Here’s the what if he proposes:
After 2-3 years, of your 11 U.S. stocks, what if 2 stocks were up 80%-100% (or more), 7 were up/down anywhere from +/- 0% to +/- 10%, and the remaining 2 stocks were down 15%, 20%, or more.
What would you do at that time?
Would your action be the same if you took dividends out of the equation?
I thought it was a very interesting take. What do you do once you picked your stocks and let them go? I decided to use his suggested growth numbers and projected my portfolio in 3 years from now. Here’s what would be the value with:
- 2 stocks up by 100%
- 3 stocks up by 10%
- 2 stocks up by 5%
- 1 stock down by 10%
- 2 stocks down by 40%
| Company Name | Ticker | Market Value | % |
| Apple | AAPL | $11,797.98 | 17.56% |
| Disney | DIS | $10,220.40 | 15.21% |
| Gentex | GNTX | $5,997.20 | 8.93% |
| Hasbro | HAS | $5,040.27 | 7.50% |
| Honeywell | HON | $5,619.68 | 8.37% |
| Lazard | LAZ | $5,815.53 | 8.66% |
| Microsoft | MSFT | $6,683.04 | 9.95% |
| Starbucks | SBUX | $4,230.48 | 6.30% |
| Texas Instruments | TXN | $5,009.40 | 7.46% |
| United Parcel Services | UPS | $2,661.56 | 3.96% |
| Visa | V | $4,102.20 | 6.11% |
The new portfolio will look like this:
And here’s the sector allocation:
There is clearly a sector allocation problem here
When I look at this portfolio, I clearly see there is a problem as 2 sectors occupy more than 70% of my portfolio. This is obviously the wrong way to build any portfolios (unless you are 100% sure you won’t mess with the two sectors you selected… hahaha!). However, the first thing I would do in this situation is not to sell some of my overweight sector. I would rather put all my retirement portfolios together and look at the global sector allocation.
The other half of my pension plan is invested in Canadian stocks in other sectors. I also have a RRSP account that is invested differently as well. Since all three accounts have the same investing goal (my retirement), I should put all my holdings together in an excel spreadsheet and make sure I have maximum 20-25% invested in any sector.
Now; do I sell my winners?
There are two problems when you look at a stock that doubled in value. The first one, you start wondering if you should cash your profit and run. The second one is that your sector allocation is completely wrong. In this example, I’d have AAPL representing nearly 20% of my portfolio alone. If anything happens to AAPL, my portfolio take a huge hit. Is that a reason to sell it?
Never sell your winner unless they are done winning. I know, easier said than done. How do you know when selling a stock that is showing a triple digits return? (did you have heard of the triple digits club?). I have a simple solution. I look back at my original investment thesis. I will keep my money invested in any companies that still meet my investment thesis. This is how I reached a few 100% returns in my portfolio so far. Selling a great company is never a good idea.
Do I sell my losers?
Then again, it could be tempting to let go of my losing stocks. After all, if they are in negative territories after 3 years, I must have missed something, right? But being in the red isn’t a reason to sell. It is a reason to take a serious look at the company situation and to validate if my investment thesis is right or if other factors have played a major role.
Therefore, I would not automatically sell my winners or my losers. I would simply examine each position and make sure they are still a good fit in my portfolio.
How to I rebalance then?
There is definitely something wrong with the sector allocation I show in the above graph. The first thing I would do is to put all my retirement accounts together in an Excel spreadsheet to see my complete sector allocation. Maybe it’s not that bad and I don’t show sectors over 25%!
In the case where tech stocks or consumer cyclical would still be too heavy in my overall portfolio; I would likely sell only a part of my largest positions. In this case, I would sell a part of AAPL and DIS since they are worth nearly a third of my portfolio.
Even if I think both stocks will continue to outperform the market after those three great years, I would have to get rid of a few shares to make sure my portfolio is back in line with a more decent sector allocation. This would probably slowdown my portfolio progression going forward. ON the other side, the whole point of selling is about keeping my portfolio as solid as possible. Therefore, by selling shares of AAPL and DIS, I make sure I am not vulnerable to a single piece of bad news affecting those companies.
Final thought: Never wake-up 3 years later
While I’ve enjoyed doing this “what if” scenario to provide an example of how I would manage this situation, it is not likely to ever happen. My investment process requires I follow each of my holding on a quarterly basis. By reading each company’s earnings reports, I am able to quickly and regularly validate my investment thesis. I definitely do not want to let my portfolio go for a few years and wake-up with this kind of “what if” situation.
As dividends are getting paid, I would also use this extra cash to balance my portfolio. Therefore, I would be able to control my sector allocation every year with the dividend payment. Unless there is a stock surge by more than 50% in a single year, I should not experience much sector allocation issues.
The fun part is that I will able to show you this strategy in the next 3 years as I report my portfolio monthly!
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