Yesterday I have talked about managing your portfolio as if you manage a business. The goal is always to grow the business or the portfolio by maximizing your returns. In this post I want to share with you my overall guidelines for managing my portfolio to see what readers think; am I on the right track or is there something I am missing.
My goals for portfolio are the following:
- Achieve an overall portfolio of 3-3.5% dividend yield on book value.
- Maintain asset allocation requirements on a yearly basis.
I divide my portfolio to two sub portfolios that I will rebalance quarterly:
- Core portfolio that will hold index funds, fixed income and cash divided to
- Fixed income and cash up to 20% of the overall portfolio.
- US market index 12% of portfolio
- Canadian Market index 12% of portfolio
- International Market index 10% of portfolio
- Emerging Market index 6% of portfolio
- Generating Ideas: I will use screens, reading or general observation of my day to day life to come with investment ideas. What I will not use is media and analyst recommendation.
- Analysis: I must figure the competitive advantage of the business and management track record by analysis its prior actions results.
- Valuation: the company must offer compelling value to its market price for one reason or another for me to be interested.
- Initiate position: buy incrementally and frequently into a stock.
Portfolio rebalancing Guidelines:
The following are my overall portfolio restraints that need to be observed to minimize over exposure to the risk of a certain investment class, once a position is over the goal it needs to be rebalanced by selling/ buying part of the position to achieve the following:
- The overall core holding to be in the range of 60% ( this is split to 40% equity indices and 20% income producing assets and cash)
- The overall non core holdings not to exceed 40%
- The overall Cash position goal: no more than 5%
- There will be no investment in more than 10 businesses in the non core portfolio at any time.
- The overall Emerging Markets positions not to exceed 15 %
- The overall fixed income positions to be in the range of 5 – 20% from total portfolio
- Any individual company in the non-core position to be limited to 10% of the overall portfolio
- The overall total small cap positions not to exceed 15-20%
- The Major market indices (e.g. S&P, NASDAQ, TSX) not to be less than 30%
- Rebalancing time frame: on quarterly basis on the following months: December, March, June, and September.
- If an asset-class allocation reaches 150% of original allocation, cut it back to below the target allocation - 75% of target allocation.
- If asset class then falls to 50% of original allocation, restore it to 150% of the original allocation(1).
- Increase cash position/ reduce positions to specified limit when yield Curve flattening or inverting. Negative differential between 10 year Treasury and 3 month TB indicate a high probability of a recession in the next 4 quarters.
- [SA1]The rationale is as follows. If one asset class is appreciating much faster than the others in your portfolio, you want to ride the momentum to 150% of your target allocation. But when you are ready to trim back the asset class, it’s probably become overvalued relative to your other assets. So sell more of it than would be required to return to your “normal” asset allocation. Similarly, if the asset class then depreciates significantly, it has probably become cheap relative to other asset classes, in which case you can overweight it.