Sorting my portfolio into "keep", "add more" and "ditch".
How my current holdings did during 2008-2009 recession.
Look at your holdings now, while the skies are blue.
In comments to a previous article, Dale Roberts posed the question of how I would feel if my portfolio lost 50%. As I have already been moving towards reducing risk and removing trades to redeploy the proceeds into more long term positions, this has had me thinking a great deal.
I had some time off this weekend, so I relaxed and played with my portfolio. I went through the list carefully, keeping in mind the concept of a deep market correction, and rated each of my holdings whether I would keep it as is, add more or ditch it. My goal is pare the portfolio to what I will be prepared to hold on to, not panic sell, and even purchase more of pre-identified quality holdings if and when the market changes suddenly. It is time to plan exactly how I will act if, and when, a correction materializes.
In Crash & Burn Part 1, I discussed how I have already been moving to a protectionist strategy what if my largest holding's value went to zero, and a more holistic scenario which also included one holding entering bankruptcy.
The commentary has been interesting and appropriately centered on risk. The varying viewpoints have been more food for thought. In this article I would like to discuss how all this theoretical discussion has a practical application to my portfolio.
There are eleven holdings that I am perfectly happy with, exactly the way they are. In order of size, McDonald's (NYSE:MCD), Ford Motor (NYSE:F), Inter Pipeline (OTCPK:IPPLF) or (TSE:IPL), Cineplex (OTCPK:CGXEF), Canadian National Railway (NYSE:CNI) or (TSE:CNR), RioCan REI (OTCPK:RIOCF) or (TSE: REI.UN), H&R REIT (OTCPK:HRUFF) or (TSE: HR.UN), TD Bank (NYSE:TD), Visa (NYSE:V), & Coca-Cola (NYSE:KO). These already have sizeable positions, all but the last three over 4%. I would like more of them but I am reluctant to add more, making them further outsized. I would rather focus purchases towards the holdings that are not so big. I have been thinking of trimming IPL, but have finally decided I will just leave IPL alone, the way it is.
Of course, a fantastic opportunity arising in any one of the above holdings could change my mind and I may add.
Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX), & Crescent Point Energy (NYSE:CPG) already have sizeable positions at 4091%, 3.96%, and 3.64% respectively, but I would add more shares of these companies to my portfolio anytime the market gives me a smaller opportunity. JNJ is my only healthcare holding and ideally, I would like it to become my largest holding.
Enbridge (NYSE:ENB), Bell Media (NYSE:BCE), Scotiabank (NYSE:BNS), & Royal Bank (NYSE:RY), are moderate sized holdings, but not on my buy list right now. I do want larger holdings in each, but sometime in the future.
Clorox (NYSE:CLX), General Mills (NYSE:GIS), General Electric (NYSE:GE), Wal-Mart (NYSE:WMT), Procter & Gamble (NYSE:PG), Walgreen (WAG), & Unilever (NYSE:UL) are all names I have what I would consider only a part position, the largest being my new entry into Clorox at 2.43%. I would like to have double or triple more. I am hoping for a summer slump to average down and deploy some of my awaiting cash into these quality dividend-growth names, despite the more recent drop in the Canadian dollar.
That leaves only Textainer Group Holdings (NYSE:TGH), WisdomTree (NASDAQ:WETF), and Blackrock (NYSE:BLK), as things I am not as excited about. Not so bad. I have already sold my AGU position, as I mentioned I would in the quarterly update. WETF & BLK concern me only because they are quite market sensitive.
TGH concerns me because it has been doing nothing even while the general market has risen last year - but with TGH I am being paid 4.4% to wait, so I will still wait. The long term chart is still in an upward trend, and it is still undervalued. I also like the diversification of it against my other more consumer-oriented holdings. However, if dividend growth were to slow further, and I am not rewarded for the risk (much higher than most of my holdings with a beta of 1.37) with a modest amount of capital gain, I will not hang on to it. I am not desperate to get rid of any of these three, but if they were to spike I would trade them in for more of my eager-to-buy list. One more benefit of trading these shares in for any of my more ideal companies, versus deploying new cash, is that these purchases were made when the Canadian dollar was close to par with the US dollar. I am able to sell and purchase without incurring exchange or the fees associated with it which I do incur with new USD purchases.
Now that I know what actions I plan to take upon significant general market weakness, I want to see how likely a 50% drop in my current portfolio actually is.
Many people lost more than 50% in 2008-2009. It was terrible. But how likely is it that my current portfolio will suffer the same in the next crash? I cannot go back and look at my actual holdings during the recession, as my former advisor did not share the holdings in his private fund, which lost 90% in 2008, 2009, and 2010. All I can do now, is look at my current portfolio's holdings. We all know that past performance does not predict future performance. However, it is one thing to look at - instead of just assuming a random 50% drop in Total Portfolio Value.
To get a vague idea of the recessionary stability of my portfolio, I want to look at my current holdings and their approximate drops over the 2008-2009 period from previous highs. This is not an exact science. My goal is to make, as realistic as possible, a mock-up of a worst-case scenario. Looking at many of my holdings September 19th, 2008 was a market high and March 6, 2009 was the market low. This is not exact for every holding, and is not particularly realistic as one cannot possibly time a sale at the low, any more than one can time the sale at the high.
|Name||Ticker||% of Portfolio||Percent Drop||Effect|
|Johnson & Johnson||[JNJ]||4.91||31||1.54|
|Cdn National Rail||[CNI]||4.42||30||1.31|
|H & R REIT||[HRUFF]||4.39||59||2.59|
|Procter & Gamble||[PG]||1.56||35||0.55|
One note on the table above: Two of my holdings, Cineplex and WisdomTree, did not trade in 2008 so they were simply dropped from the chart.
This was an interesting exercise. My portfolio did not suffer a 50% loss, though six individual holdings did. Even for my modest portfolio, there is a huge dollar difference between the assumption of a 50% TPV drop, and the 34% this portfolio suffered.
Ford Motor was my largest loss. This is not surprising since it barely escaped bankruptcy and is currently one of my largest holdings, having purchased what I would consider a full-sized position at $9.14.
Also not surprising is that the REIT's show significant losses. Considering what happened to real estate prices, I think I got off easy. The other notable losses occurred in the financial sector, again, no surprise in a financial crisis. When these are explained away, the losses are surprisingly minimal. However, I would not like to look at the numbers without these things included. This was obviously a financial crisis, who knows which sector will be in crisis next.
Another takeaway is that I need more shares in companies like Enbridge, McDonald's and Wal-Mart - the ones with losses under 20%. Of course, I am joking. As I just said, no one knows which sector is going to lead the next race to the bottom and which companies within each sector are going to hold up the best. This is why diversification across and within sectors is so important.
It would be also interesting to compare my portfolio's returns from September 18, 2008 to September 19th 2009, to see what the results of simply holding on and doing nothing would be after one year. My guess is that the vicious bite of the loss would be over, though I would not be 'back to even'.
When people wonder what a younger person is doing with a lower beta portfolio, this is it. One of the main benefits of the boring dividend-growth is the support of the dividend on the share price during market upheaval. Sure, I may be giving up possible capital gains, but I am also lowering my risk if purchases are made, developing the rising income stream I am hoping for. The majority of these companies continued to pay and even raise dividends during this time.
Smarty Pants wrote this comment on my year end review article "What a Difference a Year Makes": "It's great when you can put together a detailed plan covering the entire span of time until you retire and use it as a road map to guide your investing. When you get ahead of the road map, as you have, the pressure of needing to perform well with every purchase goes way down."
I am currently about 40% ahead of the portfolio value target I made last January for this past quarter. This gives me confidence that for the vast majority of my holdings dramatic weakness will trigger purchases for me.
Unlike someone in the distribution phase of their portfolio, I have significant funds flowing into the portfolio bi-monthly awaiting deployment. Over a year ago, Tim McAleenan wrote an article that has stayed in my mind (but I cannot seem to find it in his impressive article list - I highly recommend that you get lost reading while looking for it) demonstrating with concrete examples how beneficial a market correction can be to the long-term performance results of a buy and hold portfolio. Reinvesting dividends for a time at a lower purchase price as well as successive purchases at a lower price give the end returns a nice boost. I look forward to doing that for my portfolio.
I am certain that with the vast majority of my holdings that a dramatic market correction will cause me to dig my fingernails in and hold on, even buying more, before the roller coaster stops. I know I definitely would not say the same thing about my portfolio holdings from one year ago. Eliminating holdings that do not inspire absolute confidence now has been my main portfolio objective this spring. Doing the work and thinking through this process now while the skies are blue is very important.
Disclosure: I am long MCD, KO, JNJ, GIS, UL, PG, WMT, WAG, IPPLF, RIOCF, HRUFF, F, CNI, CVX, TD, RY, BNS, BCE, TU, AFL, CLX, BLK, WETF, CPXGF. 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.
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