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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • Writer's picturetim@emorningcoffee.com

The Great Reveal

I write a lot about financial markets and macroeconomic topics, so I suppose it is only fair that I reveal some facts about own portfolio. Let me begin by humbly admitting that I have not done everything right. In fact, the most important thing I have done right is to buy-and-hold stocks of top-drawer companies over many years, sticking with them during periods of economic turmoil and – occasionally – strategic shifts in their core businesses. I have little doubt that aggressively trading in and out of these stocks would not have provided nearly the returns I have realised holding them over the long-term, because – like all investors (that will admit it) – my timing would have been far from perfect.


Portfolio overview

As an overview, I have two brokerage accounts, one in the US and one in the UK. The US account has multiple funds that were established around initial savings goals and retirement accounts (401k rollovers, etc), and the UK brokerage is for my UK SIPP (pension). Going through the consolidation of my accounts for purposes of writing this article highlighted several mistakes I have made along the way. Of course, it is human nature to express remorse because of these mistakes, as hindsight is indeed 20/20.


One thing this exercise helped me realise is that I have too many positions, a topic that raises questions about diversification that are too detailed for this article. In general, smaller companies earlier in their evolution need more intense scrutiny, whilst larger, more established companies need less scrutiny since their price action tends to be driven more by macro trends than quarter-to-quarter earnings. Therefore, the composition of a portfolio as far as individual names – should you wish to hold individual stocks as opposed to index ETFs – will have an impact on the number of positions you own. Having said this, I would say 15-20 stocks would be the right number to ensure adequate diversification and also provide adequate time to monitor the performance of each stock. Since I am currently holding 33 positions, I certainly have some work to do in this respect!


My portfolio metrics

Let me share a few metrics of my consolidated portfolio, and then I will provide more commentary afterwards. Note that for purposes of this work, I have also included cash and deposits at banks, since I move money between my brokerage accounts and bank accounts regularly.


  • Asset breakdown, tax advantaged vs non-tax advantaged: My investment assets (including cash at banks) are roughly split 45% in non-tax advantaged accounts, and 55% in tax-advantaged accounts, the latter encompassing legacy IRAs (US), legacy rollover 401ks (US) and a UK pension fund. This is relevant for tax reasons, which I will not go into in this article.


  • My portfolio breakdown is as follows:

I also have a cryptocurrency account at a US crypto broker but have held no cryptocurrency positions since late 2017. I suppose it is fair to say that depending on when I would have bought and / or sold, I could have made or lost a lot of money on cryptos! As an aside, my allocation to “safe assets”, meaning cash and US Treasuries, is much higher than it has been in the past.


  • Individual equities account for around 67% of my investment portfolio, and stock / real estate ETFs (mostly non-US stocks including ETFs for China, Japan, and Europe) account for 8%. I hold 33 stocks (too many), of which the top 10 represent 39% of my investment portfolio and the top 20 account for 58%. My top 10 equity holdings are all individual names and include the following (in order):


You have probably heard of these companies, which gives you a flavour of the calibre and risk profile of companies in which I prefer to invest in general.


  • The sector breakdown of my equity portfolio – including individual names and sector ETFs – is as follows:

Aside from a legacy holding of technology stocks (mainly the bigger ones), I have a fairly defensive equity mix from a sector perspective at the moment, reflecting my view of the economic uncertainty ahead.

  • Lastly, I have broken down my equity and corporate bond ETFs by location listing / domicile or country/ region of focus. I have excluded US Treasuries, alternative assets, gold and cash from this analysis. I have difficulty attributing too much value to this “location” analysis, aside

from the rather modest allocation to Japan and China which are arguably more indigenous locations. As for the rest, there are too many grey areas to read a lot into the results. For example, many of the equities I own are truly international even though they have been attributed to a domicile, including Apple, Amazon, Alphabet, Eli Lilly, Starbucks, McDonalds, Pepsi, BP, Diageo, VW and many others. Also, the domicile doesn’t necessarily mean a great deal about the currency. For example, BP and BHP are non-US based, but their products are denominated internationally in US Dollars. There are other anomalies like these, and it should be apparent that the composition of my portfolio is actually a great deal more diversified both from a geographic and currency perspective than the analysis above might suggest.


A bit more history

I have held many of the individual stock positions for 20 or more years, adding and subtracting to them as conditions dictate but rarely exiting completely. I also hedge from time to time using the options market or inverse ETFs. When I think pricing and sentiment justify, I will write covered call options to generate incremental income in my portfolio. Lastly, I occasionally will place directional bets, again generally expressed through options or ETFs. This activity is done “on the side” and certainly outside my mainstream investment style.


Changes since the pandemic

As far as major moves / reallocations broadly speaking in my portfolio since the pandemic, I have made adjustments to my portfolio as follows:


  • During the onset of the pandemic as fear was gripping the market, I sold a very modest amount of my equity portfolio mainly to ensure I had adequate cash on hand because of the uncertainty that lay ahead. Of course, I regretted this within a matter of weeks as governments and central banks came to the rescue, but at the time, it seemed the sensible thing to do.

  • As some positions were getting overly significant as a percent of my portfolio in 2021 due to a buoyant market and price increases, I cut (but never exited) some of these simply to address single-name (and sector) concentration issues. Fortunately, many (but not all) of these reductions came at prices near the highs, especially when I was lightening in mid / late 2021 as it seemed apparent then that prices were becoming unhinged from underlying company fundamentals. These reductions were most pronounced with my holdings of large tech names, including Apple, Amazon, Alphabet and Microsoft, and time proved that these were smart moves.

  • I did get sucked into FOMO, buying a few stocks of emerging technology names in early 2021 at ridiculous valuations, and then holding them too long. I have exited nearly all of these now, and this diversion unfortunately was costly.

  • Using money I took off the table from lightening on some of my large tech names, I generally redeployed into stocks of more defensive companies, including “boring” names in defensive sectors like consumer staples, energy and healthcare.

  • I also have moved more aggressively into fixed income.

    • My first purchases of bonds (ETFs) occurred in April 2020 when the Fed decided to include corporate bonds (and specifically high yield ETFs and “fallen angels”) in its QE programme. This was one of many times when the Fed offered clear support to investors – buy high yield bonds! I slightly altered my exposure to corporate credit as the euphoria came off of risk assets and high yield prices peaked, which naturally coincided with the Fed starting to signal that it would tighten monetary policy.

    • I then migrated into a combination of leveraged loan ETFs and short / intermediate term investment grade corporate bond ETFs, which provide better protection in terms of credit quality, location in the capital structure, and changes (i.e. increases) in the Fed Funds rate. This reflected my view that the US economy would gradually slow because of tighter monetary policy.

    • Earlier this year, I could no longer resist the yields on US Treasuries. As an aside, I have never owned US Treasury bonds until this foray. I have now purchased a series of US Treasury bills, sticking with two to six month maturities. I will continue to roll these and might even increase the allocation because the yields are so enticing, but I will probably purchase bills with maturities no longer than 12 months.

Collectively, these moves have most certainly dumbed down the beta in my portfolio, trading potential upside in capital appreciation for more stability (hopefully) and higher dividends and interest going forward.


Returns

It is only logical to ask how I have done as far as returns. Unfortunately, because of moving funds in and out of accounts (within brokers and between brokers and banks) and transitioning some traditional IRAs to Roth IRAs in 2020 and 2022, I cannot answer this very accurately. However, I would say that before COVID when I was fairly heavily weighted towards tech names, I most certainly outperformed the S&P 500. I certainly generated some very attractive appreciation during this period, index-comparison aside. However, it has been more of a rocky road since COVID, mainly because I drifted into some stocks I ought not have in 1Q21 (and stuck with them too long), and because I consciencely reduced the risk in my portfolio, the outcome of which will only be understood once more time passes. I do intend to do more work on this, although I might not like the answer! In the meantime, you can see below the annual returns on the two largest components of many people’s portfolios since 2019, and the annual returns had you had a 70/30 mix between US stocks and US Treasury bonds.


Conclusion

I also hope there are some messages in this article that resonate with you. Writing it has certainly been enlightening to me, and not completely in a positive sense! Time and time again, I come back to the mantra of invest for the long term, and if you want to trade, do it around the edges not on an “all in” basis. This strategy is rather rudimentary and boring I admit, but I am certain that it will pay off in the long term.


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1 comentário


Convidado:
15 de mar. de 2023

Enjoyed this post!! Interesting to hear about your portfolio journey!

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