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DCUDFlyer (26.58)

First Crack at a Focused Rebalancing



July 23, 2013 – Comments (13) | RELATED TICKERS: JNJ , MCD , MO


This is my first blog post as well as my first attempt at rebalancing my portfolio. For background, I began investing in my Roth IRA immediately upon accepting my first full time offer after graduating college. I started simple enough with stocks I knew which lead to me “investing” aka gambling on stocks I found interesting or made the news. Somehow, this strategy along with investing in wide market ETFs produced less than impressive returns – 14% (unadjusted for dividends, buybacks, fees, etc.) since 2008. I recently brought a child into the world which has led me to reevaluate my finances. As a point of reference, I’m employed full time with no debt other than student loans and am 28 years old.

Ok…here goes my first shot at a “focused” i.e. disciplined approach to rebalancing. Right now my portfolio is skewed…20% in medical, 20% technology and 20% financial sectors. I’m hoping to manage risk a bit more conservatively. ANY thoughts, suggestions, opinions, rants are welcome!

·         Notes

o    For ease of discussion, assume $10,000 of resources.

- Current portfolio contains 23 seemingly random equities and ETFs

o    Planning on dollar cost averaging into my selections over the next quarter to reduce risk of poor entry point.

o    Well begin by locking in gains and liquidating to cash

·         Plan

1.       10 established core holding stocks (60%) - Large Core, Dividend > 2%, MOAT (subjective), ROE >15%, PE<20

2.       2-3 ETfs – (30%)

o    Gain exposure to sectors a) not covered in Section I and b) “riskier” sectors

- Small Cap

- International (ex-US)

- Tech ETF

- Real Estate ETF

3.       2-3 Mid Cap/Small Cap Growth Stocks (10%)

·         Screen and Results


- Added CSX, KMB, MMM

- Reduced position in C, but will maintain

- Reducing position in SPDR

2.       VB, VEU, VNQ, XLK

3.       LPSN, EBIX

- Currently in my portfolio as losses. I think both are very oversold and represent a good risk/return 

Any thoughts?? Ideas? Concerns? Am I crazy?


13 Comments – Post Your Own

#1) On July 23, 2013 at 9:47 AM, hanover67 (< 20) wrote:

I'm not familiar with all the stocks/ETFs you mention, but I believe oil & gas will be the primary source of fuel for a long time to come, so I would add a deep-water offshore driller like ATW, RDC, of SDRL.

Second, I would reinvest all of the dividends in the same securities that pay them to take advantage of compounding for the next 37 years.

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#2) On July 23, 2013 at 11:28 AM, DCUDFlyer (26.58) wrote:

Thanks for the comment hanover67!

Interesting first point. ATW is intriguing at current levels..going to place this one on my watchlist for further consideration.

Second, I'm definitely reinvesting the dividends.

Thoughts are welcome! 

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#3) On July 23, 2013 at 12:24 PM, hanover67 (< 20) wrote:

Another idea - get in the way of a trend, i.e. more garbage. Waste Management (WM) is a steadily growing business, there is going to be more and more garbage as the population of the world increases. It's a well-managed company, moving into "green" technology to convert garbage to energy, and it pays a dividend of 3.45%.

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#4) On July 23, 2013 at 12:36 PM, Schmacko (92.16) wrote:

23 Positions is too many for $10k in assets.... I'd probably consider it too many in general.  If evenly distributed you're talking $434ish per stock/etf.  If you invest in blocks of $434 you need the asset to go up 3.2% - 4.6% just to break even (assuming a low cost broker charging $7-$10 per transaction).  That's not insurmountable by any means but you're also talking about dollar cost averaging into those positions so I'm assuming your block is a little smaller.  If you buy $217 of a stock and then buy another $217 of that same stock, when you sell your position you'll need it to have gone up 4.8% to 6.9% to break even.

For 10k I'd have 8-10 positions max.

I'm not sold on the automatic DRIP investing thing.  I'd much rather the dividends all go to my "cash" and then when a sufficient amount of it is pooled up I choose which equity to invest that money into.

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#5) On July 23, 2013 at 12:56 PM, DCUDFlyer (26.58) wrote:

Thanks for the thoughts hanover67 and Schmacko - 

@Schmacko - My plan allows for 16 stocks (reduced from 23). I understand your concern about too many positions with immaterial balances.

How would you cut down my list above to 8-10 picks while reducing risk?

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#6) On July 23, 2013 at 6:06 PM, Schmacko (92.16) wrote:

If you want the categories you have above something like

4-6 Bluechip dividend stocks

1-2 ETFs

2-3 Spec growth stocks.

Example portfolio might be:

KO, COP, VZ, WFC, MRK -5k <- All $80bil+ corps yielding over 2.5% You have a consumer good, energy co, telecom, financial, and big pharma company

EWZ, and EWA - 2k because you love Brazil and Australia? and both pay dividends

EBIX, LPSN, and ERII - 3k I just lifted the first two from your post above and ERII cause a play on desalination is way different than anything else listed

You have 8 companies and 2 ETFs that are pretty diversified.  Obviously you can switch any of those out for stuff you actually like.  Diversification reduces risk and you can be diverisifed. Your dollar cost averaging idea reduces risk as well, but I think you can do that better with less positions and slightly larger initial dollar amounts.

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#7) On July 24, 2013 at 9:44 AM, DCUDFlyer (26.58) wrote:

Thanks for the feedback Schmacko! Well written and informative.

 I like your idea re: ERII, though I may look into a different sector but with the same philosophy (i.e much different than the other picks). 

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#8) On July 24, 2013 at 4:05 PM, constructive (99.97) wrote:

Welcome to TMF/CAPS.

I don't think the small cap and real estate ETFs will provide much diversification value, when small caps and real estate stocks are trading at signficantly higher multiples than the market.

Australia and Brazil are very driven by the commodity cycle. So, keep that in mind that EWZ and EWA may be the most cyclical part of your portfolio, which may make them less attractive in terms of diversification.

LPSN is not very profitable, and EBIX is facing allegations of accounting impropriety, and as a result Goldman Sachs walked away from acquiring them. Do you know more about Ebix than Goldman Sachs does?

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#9) On July 25, 2013 at 9:12 AM, DCUDFlyer (26.58) wrote:

Thanks MegaShort - 

What ideas do you have in mind for diversification? Certainly, right now small caps, real estate, etc. may be trading at higher multiples than the market; but I'm investing for the very long term and not AS concerned about current multiples.

EWZ and EWA won’t be included in my portfolio at this time.

LPSN is not very profitable, correct...but has grown revenue 21% over the last 3 yrs. It’s significantly beat up after losing a few “key” accounts but think the service they provide is valuable and may be an acquisition target…ORCL or MSFT, perhaps? A small position but worth the risk IMO.

I’m certainly not claiming to know more about EBIX than GS. I DO know that they’ve experienced stellar revenue and earnings growth and trades at a PB of 1 and PS of 2. Enormous margins (34% vs. 10% for the industry) and 3 yr revenue growth double that of its competitors. While I wait for the accounting “issues” to get cleared up, I’ll collect a stellar yield. I think it’s worth the risk, and if it tanks it won’t impact my overall portfolio to a large extent.  

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#10) On July 26, 2013 at 5:57 PM, constructive (99.97) wrote:

For diversification I would primarily look at emerging markets (not necessarily focusing on Brazil though) instead of small-cap and real estate. The same goes for bonds.

Normally I don't pay much attention to who owns or doesn't own a stock, or what the consensus or contrary view about a stock is. But Ebix is a very unusual situation. Due diligence almost never kills buyout deals.

For me, the most likely explanation is that Goldman determined that EBIX is in worse shape than their public filings show. I think they have significant information that I don't have.

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#11) On July 28, 2013 at 11:20 PM, Zack907 (< 20) wrote:

Great idea to blog about what you are doing with your portfolio to get feedback. It's a great way to learn about the mistakes you are making before they mess you up too much.

When I first started investing I believed that AHM ( A mortgage company in 2007) was an awesome stock to buy because it was selling at a fraction of book value and I don't think the negative earnings had hit yet. My reasoning was that the market was being overly hard on mortgage companies and eventually the economy would bounce back and I would be looking really smart. Luckily, some Fools warned me of the error of my thinking and I was able to get out before losing too much. This event helped me to realize that investing in stocks requires more work than I was putting in (I had read books and tons of blogs and articles on the internet, I did screens for what I thought was important, etc, but I wasn't reading the annual reports, or looking at historical numbers going back more than few years).

The point of that rant being that investing in winning stocks takes more effort and is harder than it seems. Until you have proven a winning track record over at least one full economic cycle, I wouldn't try to invest in ANY individual stocks. Just follow Benjamin Graham's advice and buy a total market index fund and keep it at a set ratio 50 or 80% and then rebalance when the ratio gets much different. Yes, it's boring and easy, but it will almost definitely outperform trying to diversify with $10,000. 

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#12) On July 29, 2013 at 11:23 AM, DCUDFlyer (26.58) wrote:

Thanks, Zack907. Thanks for sharing the story about AHM and your point about broad based index funds has been something I've considered in the past. My thought is to accumulate a basket of mega cap, dividend payers with a long history of earnings to serve as the foundation; I think this provides me with greater dividend growth and more upside than say SPY or something else.

 @Megashort - regarding Ebix, came across this article on Seeking Alpha. I'd be very interested to hear your thoughts - 

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#13) On August 10, 2013 at 9:10 PM, jbs4radio (71.74) wrote:

If you'd like to balance it out a bit better I suggest reading a few of my Blogs.  I am by no means an expert.  I have however learned some valuable lessons. I would be interested in your view of "homework" before you decide to buy into a stock or mutual fund.

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