How to manage your portfolio exposure

There are a few good reasons why most professional well known portfolios do not go over 5% of exposure on any given stock. Algorithm and long term statistical data point to a specific way to preserve your capital and balance your risk reward variable.

Below are some of the rules that helped me generate around 20 % annual return for the last few years.

  1. Rule number one : do not have more than 5% exposure on any given stock.
  2.  Rule number two: do not have more than 20 % exposure on any given sector ( example Energy)
  3.  Rule number three: Do not fall in love with a growth stock. If this stock goes from 5% of your portfolio to 15 % in 2 years, be disciplined and sell some of it to put the exposure back to 5%. And proceed to buy another stock with the capital gain.
  4.  Rule number four: Embrace major pull backs, if one of your stock plunges 40 % in 8 weeks because of non sense short term fears, buy more of the stock. Chances are the stock will rebound and you will make more money over the long run.
  5.  You do not need to read to much specialized media, it will probably make you sell a stock at the wrong time and remember  those websites want to sell subscriptions and publicity ads. Concentrate on the balance sheets of the companies you are holding.

30 stocks is enough

Today I would like to give my opinion about the number of stocks that is needed to be well diversified in order to achieve a good long term total return and control the variance of your capital.

Let us take a few examples of well known portfolios.

  1. Vanguard Etf VIG : the top 10 holdings are vig etf

As you can see those major holdings are taking around 1/3 of the total portfolio.

vig 2

the next 20 names is adding another 35 % of the portfolio, so the first 30 names are really doing the heavy lifting. This Etf has 182 names but the remaining 150 holdings are in % very small and I really do not see how having that many holdings would make a big difference in terms of capital preservation and long term total return.

 

2) Let us take a look at Warren buffett holdings

warren buffett

His top 10 holdings are at 74.72 % of the total portfolio, now I am not at ease myself with that much concentration, but when you look at this investor track record in wealth creation we have to admit he knows what he is doing and he has proven so in a long period of time.

 

3) This one is from a friend I know who is also a very successful retired multimillionaire, who build over 30 years a very stable portfolio. 

charles

charles 2

So to summarize 30 stocks is enough if you would like to build a successful well balance portfolio that will create wealth in the long run.

 

Mr Bogle Legacy

Dear Investors,

We recently lost one of the most prominent and well known investor of the 20th century. See below link for the summary of this visionary.

 

mr bogle

Mr Bogle legacy

R.I.P

Although I have not agreed with all his rational, most of his logic concerning passive investing through low cost ETF stands true over long periods of time just as basic mathematics will remain in place over centuries.

 

Bargains are still available

Dear Dividend investors,

10 years into this bull market, there are still bargains in the market. I wanted to share some of the names I already have in my Portfolio or intend to build a position in.

1st Target is Brookfield Property partners sticker BPY.

This is an entity of Brookfield asset management that spun off in 2014. At first you might think it’s 7% yield @ 17.59 Us$ is a trap. I believe it’s just one of those stocks the market just forgot to look at.

Brookfield increased the dividend at 6% annually, 9% of compound growth on cash flow from operations. The growth is here to stay for the next few years because this entity owns real estate primarily in commercial retail, industrial, hospitality sectors that it leases under long term contracts. there capacity to recycle capital by selling mature assets and buy new opportunity will profit the acceleration of income on those contracts. So the math is simple, you add 7 % yield + at least 6% dividend growth = 13 % total return in the long run….. I will take that any day given the nature of this stable business. This is the reason why I started a position and will build around 500 units within the next couple of weeks or months depending on the price.

bpy

 

2 nd target Exxon Mobil Corp

Yes I know it is not very original but this company is very well run and if you look at the current price level we are close to a 10 year low with a 4.55% dividend yield. You can certainly expect 4 to 5 % growth in any type of market. Again math is simple that is a close to 10 % total return, I will most likely add to my position shortly. I think the price is to low to ignore if you don’t have a position or want to add on to it.

xom

 

3rd target is MMM

Yes I know nothing very exciting about this old school Industrial but hey this large cap is so out of favor that the stock plunged from 252$ to 189$ in 1 year. So this gives you a 2.8% yield and a valuation that is much more reasonable, for a company that still has a strong moat and is well managed company. Dividend went from 63 cents a share in 2013 to a 1.36$ currently even if you are conservative you can expect 7-8% growth per year long term.

mmm.PNG

Pullbacks are necessary for efficient share buybacks.

When you see some of your holdings going through price pullbacks of 10-25 % in a short period of time on no particular fundamental reason, you tend to focus on the negative short term sentiment going through the market. One group of companies will benefits from price declines though, those with big share buyback programs.

The mechanism is quite simple when price are lower, the company can buy back a lot more shares and increase future earnings per share therefore increasing profitability.

Some of the biggest beneficiaries are:

Visa

Between 2008 & 2018 over 50 % of the float went away. Look at the price chart…

visa stock chart

 

Apple computers

between 2012-2018 around 31% of the float went away.

aapl

Granted, this is not the only factor providing price increases on stock, but anything helping a profits will push in the right direction. So embrace pullbacks they will make you richer in the long run.

 

 

Blog at WordPress.com.

Up ↑