If Your Retirement Portfolio Is Diversified And Well Allocated, You Can Take A Few Bullets

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 |  Includes: AAPL, BKCC, BMY, CSCO, CSX, CVX, F, GE, INTC, JNJ, KKR, KO, LNCOQ, MCD, NEM, NLY, O, PG, T, WFC, XOM
by: Regarded Solutions

I have been writing about some individual stocks of late, and have taken as many negative feedback comments as any other contributor who puts themselves "out there" does. I get the feeling that many folks rejoice when some of the more popular writers are wrong, or even if they are wrong for a moment.

My case in point are two recent articles which I have been taking heat on; this article about Linn Co, LLC (LNCO), and this article about Annaly Capital (NYSE:NLY). In one I happened to be right about dumping, and the other stock I believe is oversold and will eventually make investors money. I stand by my opinions, but the main reason I can voice my opinions in this manner goes much further than just my analysis of the stock.

It is all about portfolio and asset management. The entire portfolio must be taken as a whole and looked at as components to a puzzle. Some pieces of the puzzle are larger than others and have a greater roll, some pieces of the puzzle offer color, or flavor, or simply part of a backdrop that highlights the best features of the puzzle.

We MUST look at the entire portfolio to maintain a prudent financial strategy.

Diversification And Allocation Are Almost Everything

The Team Alpha portfolio consists of Ford (NYSE:F) Chevron (NYSE:CVX) Apple(NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson(NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital(NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp.(NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (),Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Newmont Mining (NYSE:NEM), Intel (NASDAQ:INTC), and Wells Fargo (NYSE:WFC).

When it comes to building a portfolio strategy, many investors look at the hot stocks or high yields and feel that more of those are better than less. This is the path to financial ruin folks.

Just because a stock is yielding a 12% dividend right now does NOT mean that it is prudent for investors to plunk down 25% of their entire nest egg in that one stock. Yes, Annaly is a holding within the Team Alpha Retirement Portfolio, but we have just a 4% allocation in that stock. If the stock goes down to zero, the entire portfolio will take a hit of about $5k (maybe less).

Since the overall value of the portfolio stands at about $141k right now, (up about 41%) this "doomsday" scenario would impact the portfolio in a way that it would be UP "only" 36% if the worst case scenario occurs.

When a stock is allocated as a risk opportunity, investors can limit the downside yet take advantage of the potential rewards. In the case of NLY it is the extremely attractive dividend yields, as well as the apparent discount to book value.

Let's take a look at The Team Alpha Retirement Portfolio's diversification and allocation:

Stocks Held Allocation %
O 6%
KO 3%
GE 8%
JNJ 6%
XOM 6%
T 5%
PG 6%
NLY 4%
CSCO 6%
MCD 7%
BMY 2%
WFC 3%
KFN 4%
BKCC 4%
CVX 4%
NEM 5%
CSX 4%
AAPL 7%
F 2%
INTC 3%
Cash 5%

100%

Click to enlarge

Notice that NLY currently has only a 4% allocation. While I believe that at the current price I might be able to up that to 6%, I have not done so as of yet.

Taking a look at the overall portfolio, you can clearly see the amount of dollars invested.

Stock #Shares 6/28/2013 TotValue
XOM 100 90/shr 9000
JNJ 100 87/shr 8700
T 100 36/shr 3600
GE 500 23/shr 11500
BKCC 600 10/shr 6000
AAPL 20 394/shr 7880
PG 100 78/shr 7800
KO 100 40/shr 4000
NEM 200 28/shr 5600
WFC 100 42/shr 4200
O 200 42/shr 8400
KFN 600 11/shr 6600
NLY 400 13/shr 5200
CSCO 400 25/shr 10000
CVX 50 119/shr 5950
BMY 100 46/shr 4600
MCD 100 99/shr 9900
CSX 200 24shr 4800
F 300 16/shr 4800
INTC 200 24/shr 4800
Cash Rsvs x x 8317
Tot Value x x 141647
Click to enlarge

Here is my bottom line folks: I will take the 5k "hit" as a worst case scenario because the portfolio is well allocated and diversified. In the event my opinion of the stock happens to be right, the upside is overwhelmingly in my favor.

Not only that, but by taking action on LNCO when I did, a bullet has already been dodged, and we actually can afford to take on a bit MORE risk because of that particular call.

My Opinion

Anyone can pick stocks to go up or down, but if that is done in a vacuum, without regard to an overall prudent financial strategy, stock picking is doomed to fail over the long term.

Anyone feeling the need to toss rocks at this dividend income portfolio strategy should really reflect on what their investment goals are, before laying down one cent on any stock.

Disclosure: I am long AAPL, BKCC, BMY, CSCO, CSX, CVX, F, GE, INTC, JNJ, KO, MCD, NEM, NLY, O, T, WFC, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.