Almost 10 years ago I packed in our U.S. ETFs and built a stock portfolio. It’s a public portfolio and it constitutes the bulk of our (for my wife and I) U.S. RRSP investments. Due to a spin off and merger the portfolio is now 20 stocks. The strategy was to build a portfolio that would be more shock-resistant and retirement-ready. So far, mission accomplished on that front. The portfolio has outperformed the S&P 500 over the full period, and when it mattered most – from the disruption of the world’s first modern day pandemic and the resulting (but not lasting) inflation shock.
“Managing” this stock portfolio has been an incredible learning experience. That was a secondary goal of moving to a stock portfolio from the wonderful land of ETFs. While I had confidence in the stock selection strategy, if I was going to continue writing for investors I needed to learn how to manage a stock portfolio. Most self-directed investors in Canada and the U.S. build stock portfolios. They then supplement or fill in holes with ETFs.
Stock portfolio lessons
My greatest observation (or lesson) has been how easy it is to manage a stock portfolio. There is that expression that …
A portfolio is like a bar of soap. The more you handle it, the smaller it gets.
That’s easier as well when your start with a quality approach, as I did. I skimmed 15 of the largest cap dividend achievers. The index required 10 years of dividend growth while quality filters will also applied.
I bought, held, and added. And I certainly made some modest ‘guesses’ along the way with respect to how to invest new monies.
I did not rebalance either, I let the winners run. But keep in mind that when managing a stock portfolio rebalancing is usually a beneficial move as it keeps the position weights in order and usually finds greater value. Money is moved from the winners to the underperformers.
It takes very little time to manage a stock portfolio if you trust your original investment thesis. For me it was largely ‘recreating’ an existing index by buying 15 of the largest cap constituents. I call it index skimming. The 15 stocks were added to existing holds of Apple, BlackRock and Berkshire Hathaway. Those positions were double weighted.
While we might enjoy watching our companies performance and earnings, it’s best to not react. To sell out based on a bad earnings report or two is to guess about the future. We have no idea if management will be able to fix any near-term issues. How would we ever know more about a business than the folks that run that business?
I found a few winners
I have certainly been guilty of some ‘active management’ with respect to where I’ve invested new monies, and the dividends that accumulate in the accounts.
On Seeking Alpha, I recently looked at the performance of our U.S. stock portfolio.
For context on reinvestments, here’s the portfolio:
The 15 dividend achievers are 3M (MMM), PepsiCo (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies (UTX), Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT).
The original picks, Berkshire Hathaway (BRK.B), Apple (AAPL) and BlackRock (BLK).
United Technologies merged with RTX Corporation (RTX) and then spun off Carrier Global Corporation (CARR) and Otis Worldwide (OTIS). That spin off (removing UTX, adding three) took the portfolio to 20 holdings.
On reinvestments I favoured Lowe’s, a wonderful outperformer. As I’ve penned a few dozen times “I could buy Lowe’s all day long”, and I did in my wife’s account. Also in my wife’s account I hit the sweet spot for recently overweighting Colgate-Palmolive.
Berkshire Hathaway is by far the largest position in my wife’s accounts due to reinvestments. That stock, and Warren Buffett, has moved back into considerable outperformance mode over that last 1-3 years. It has paid off to greatly overweight that stock.
I was very patient to add to QCOM and WMT when they underperformed out of the gate for the first 4-5 years. I did not second guess management, I kept adding monies. Both companies then went into outperformance mode in recent years. That trust was rewarded.
Carrier rec’d some good monies during the COVID period, that seemed a no-brainer. Air solutions during a pandemic? Global warming? The stock went on to massive outperformance.
Perennial winners such as Apple, Microsoft and Texas Instruments didn’t need attention. Let ’em go.
The losers
One loser that I tried to overweight is CVS. That has not worked out yet. I’ll certainly wait. A big loser such as 3M rec’d no money. It looked weak from the beginning. Medtronic was ignored. RTX rec’d a small sum.
Net net my deployment of new monies greatly went into more favourable investments.
Preparing for retirement and rebalancing
While I am already semi-retired, my wife is in the retirement risk zone. She will retire or semi-retire in about 3-4 years. Given the increasing risk, some of the spectacular stock gains have been harvested and moved to bonds – long and short.
Some Texas Instruments, Microsoft and Nike profits have built up the bond position, much of it in the cash-like UBIL.U, an ultra short Treasury ETF earning about 5.5%, in U.S. Dollars. That’s a rate that now beats inflation. In my wife’s RRSP accounts she is in the area of 20% to 35% bonds.
Nike’s valuation looked ridiculous. The stock went on a crazy run. From 2020 to 2022 the position was greatly paired.
The stock is in free fall. But no worries, much of the profits are secure. The position is now very small, but of course I’d like to see it recover. I’m happy that TXN and MSFT continue to thrive. They will likely face some more trimming over the next 3 years. Rising stock prices creates retirement income. The best kind.
Managing a stock portfolio in preparation for retirement can be easy. I built up a defensive name such as Colgate-Palmolive, expensive growth stocks were trimmed. We set limit sales along the way, laddering up. When the markets cooperate, we add more and more retirement income thanks to higher stock prices. The profits can be moved bonds, long and short, gold and more defensive stocks.
Over the course of your long wealth accumulation process you will be offered these retirement-readiness opportunities.
The portfolio performance
The performance shown below simply outlines the returns available. And one can certainly manage a stock portfolio in more robotic fashion. Rebalance and mostly keep your weights in check to avoid any serious concentration risk. And pay attention to tax considerations when rebalancing in a taxable account. We do not have to be too strick with respect to rebalancing.
The following represents dividend reinvestment (PEP dividends go back into PEP) with no portfolio rebalancing. This chart reflects a very passive (hands off with dividend reinvestment) approach.
The UTX spinoffs have added a nice little boost from 2021. It’s a wonderful grouping.
Managing a U.S. stock portfolio has been a wonderful experience. A great learning opportunity, and we’re fortunate that the returns have been favourable. That said, the goal was not to outperform, but to create a retirement-ready portfolio. It works in concert with our Canadian stock porfolios and those bonds and gold.
I recently reported on my wife’s Canadian stock portfolio.
And certainly building stock portfolios is not for everyone. And it’s not necessary. You can build a wonderful ETF Portfolio or look to the asset allocation ETFs. These are well-diversified global portfolios available as one fund solutions.
I recently updated the asset allocation ETF performance page.
The Sunday Reads
Dividend Hawk looks to the stock stories of the week, including from Pembina Pipelines.
Pembina Pipeline Corporation (TSE:PPL) Announces Pembina Gas Infrastructure’s Agreement to Acquire Midstream Assets From Veren Inc.; PPL announced its Pembina Gas Infrastructure unit, which is jointly owned by KKR, will acquire four oil battery sites in the Gold Creek and Karr areas, which have a natural gas handling capacity of 320M cf/day and liquids handling capacity of 53K bbl/day.
The Banker on Wheels weekly review includes Vanguard asking and answering – how much cash should you have in your portfolio? Of course, the word cash can also ‘mean’ ultra short term bonds. That’s a very solid post. That’s my two cents.
And speaking of cash, at The Hub Vanguard introduces an ultra-short bond ETF. It’s their first new ETF in four years. It’s a 1-12 month bond ETF offering. CBIL from Global-X (formerly Horizons) is a 0-3 month offering. The current yield is 4.5%.
I recently updated the savings and GIC rates at EQ Bank.
At Stocktrades Dan looks at 18 U.S. CDR stocks available, plus an outline on Canadian Depository Receipts.
Tweetverse
As the U.S. gets set to start their rate cut cycle this week, here’s an interesting table
In Making Sense of the Markets for MoneySense, Kyle shows …
Futures markets are now pricing in an 86% chance that there will be a 0.25% rate cut from the American central bank next week, and a 14% chance there will be a 0.50% cut.
While Canadian oil stocks are free cash flow gushers, we do need a certain oil price.
And it’s important to know the risks and manage our oil and gas weighting. Some types of stocks love lower inflation, falling rates and lower oil prices. #diversification
Pair up the Rothery value portfolio with the Beat The TSX Portfolio? I like this idea a bunch, stay tuned for future posts and evaluations.
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ETFs / Stock Portfolios / Retirement Strategies / Wealth Creation
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