It is an exciting day! Its portfolio review and rebalancing time on our path to riches!
What Is Our Objective?
- Ensure your portfolio balance remains in line with your investment strategy
- Act on imbalance identified in 1.
- Evaluate your investment holdings to determine if they still meet your investment selection criteria.
- Sell anything that does not meet requirements in 3.
- Have a wee dram in your favorite armchair.
Hands-On Approach to Riches
It is important to note here that I take a hands-on approach to investing. My investment accounts are self-directed, with minimal transaction fees and full transparency and access to my holdings at all times. I have not met a broker yet that earned my trust. To support my hands-on investment approach, I invest heavily in knowledge while maintaining control of my emotions. Investments are business transactions, not emotional journeys.
There are a few ways that I monitor my investment performance.
The first and most important step begins with selection of investments prior to purchase. In this stage of analysis, a company must meet certain criteria that I define in my Investment Policy to be considered for my holdings. I believe when investing, you make your money when you buy.
Buy not on optimism, but on arithmetic.
Benjamin Graham
A Critical Point
You do not lose money on an investment until you sell.
To clarify this point I offer the recent case of Bill Ackman of Pershing Square, who in media releases has lost more money on Berkshire than anyone in the world. Pershing Square Capital Management held a $1Billion stake in Berkshire at the end of March. BRK-A share price in Feb of 2020 was an all-time high of $343,000 per share, dropping to $257,346 at its lowest in March.
In May when Pershing Square sold BRK-A, taking a severe loss, the stock was selling at $253,501 at its lowest. BRK-A is currently selling at $349,222 per share, a new high for the stock.
And, this loss was avoidable.
You do not lose money until you sell your position at a loss.
Moving On
When I evaluate a stock for potential investment I am determining the soundness of the underlying business, the performance history of earnings and dividend payments, the price at which this stock represents purchase as an investment and the price at which it is too risky to hold in my portfolio.
Monitor
I monitor my holdings based on the points above and act when buy or sell criteria are met.
If major economic trends impact overall valuations across markets, I begin searching more aggressively for investment opportunities. For my investment criteria there are several troubling trends in markets that limit the number of opportunities that meet my needs. Three broad examples of this in current markets are 1. High corporate debt; 2. Overvalued asset prices; and, 3. Spiking values of intangible assets on corporate balance sheets (As of 2020 90% of all assets in the S&P 500 are now intangible).
What About The Fun Part
The scorecard? What about knowing your portfolio performance each year?
If you do work with a broker and they provide performance figures you should still, verify the results. Many brokerages omit dividends, fees, currency fluctuations and do not provide a total annualized return in performance reports. A broker presenting you with a statistic such as 16% return over 4 years should be questioned. This represents an annualized return of only 4%.
Small Portfolio?
When your portfolio is small you will likely make use of spreadsheets for tracking and calculating portfolio performance. This is labor intensive, and it is easy to make errors, but it is an inexpensive and direct way of measuring performance and providing visualization of your portfolio.
Death In Fees
A variety of companies offer stock portfolio trackers with visualizations. These companies charge up to $500 per year for membership and access to portfolio tracking tools. How much should your portfolio value be to offset the costs of fees and tools such as this? I think your portfolio must first meet your investment goals and when ongoing returns exceed these goals and provide enough additional income to cover additional expenses you can add on resources and tools that aid in managing your portfolio.
If you started a new business, you would not hire an assistant until the income of the business provided stable income and additional earnings to cover the cost of employing the assistant.
Goals
If our goals are annual return of 4.4%, annual dividend income of 1.9% this would mean our portfolio value would have to be greater than $26,500 with annual return and dividend income exceeding these goals significantly to justify an additional $500 in annual fees for portfolio tracking tools. Do the manual labor and pay yourself $500 per year. You may consider advanced tools to support management of your portfolio when your total value exceeds $2.5 Million, then the $500 annual fee represents approximately 1% of your annual dividend income alone. A reasonable margin to ensure protection against loss of capital, our primary goal.
Rule #1: Do not lose money. Rule #2: Do not forget Rule #1.
Warren Buffett
My online brokerage provides free tools for benchmarking, monitoring and balancing my portfolio and anything more advanced I can build in spreadsheets or other free tools.
Through the year I am always reinvesting dividend income back into my portfolio to maximize compounding potential. My own personal no fee dividend re-investment plan (DRP/DRIP)
My Scorecard Focuses On 2 Things
- Annualized Return – represented as growth on total portfolio value year-over-year adjusted for new capital investment
- Annual Dividend Income – represented as income as a percentage of stock value per share
NOTE: I do not cover tax implications of returns or dividend income in this post, assume your portfolio is held in tax free accounts.
In my online brokerage account, I can obtain a summary of dividend payments for a select time period. For an annual review I will extract data from Jan 1 to Dec 31 of the year under review.
And The Tax Man
For any US stocks you hold, the IRS will levy a 15% withholding tax on all dividend payments. My accounts record this deduction and my annual dividend income is calculated on NET dividend income.
This is where a world of potential interpretations exists in how calculations may be made to report performance metrics.
Being conservative I want to ensure the cash earned over capital invested continues to grow annually at a rate that meets or exceeds my investment goals.
I recently reviewed a few investment firms brochures designed for attracting new clients, it made me think of a book written by Darrell Huff How to Lie With Statistics.
If I Were Living On Dividend Income
I would defer spending by one year, meaning this year I would live on dividends earned last year. Not dividends anticipated this year. By doing this you are essentially saving for next years expenses. Subsequently, this removes the uncertainty associated with market pressures and timing of dividend payments for income.
It also stabilizes your budgeting because the income that you will live on this year is known and was received last year.
Do Not Live On Forecasts
Indeed, living on forecasts drives emotion and may lead to unsound investment decisions.
Oh dear, by the time I finished writing this our BRK-A market price has dropped to $346,500 per share. With a $1Billion buy in earlier today at $349,222 per share, if I sold now with the drop to $346,500 per share, I would lose $7.8Million in capital.
It is a very good thing we manage our emotions as investors.
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