In June 2014, I wrote an article in which I launched my 85/15 Portfolio. My goal was to build up a portfolio with limited risk and exciting long-term growth potential considering the following assumptions:
- Asset allocation: Only USA equities and ADRs;
- 85% of the overall capital (Group A) is allocated to a maximum of 10 blue chips with outstanding performances, tentatively with similar weight;
- The remaining 15% (Group B) is invested in a maximum of 5 fast growing companies with great potential, and with similar weight;
- Annual share appreciation on average of 5% for Group A and of 20% for Group B;
- Dividend yield of around 4% for Group A; and
- A time horizon of 20 years with a possible extension for another 5 years.
Note: The goal of the overall return is 7.25% (85%*5% + 15%*20%)
The assessment of companies to invest will be made by fundamental analysis (primarily) in connection with technical analysis. The latter will be used for confirmation purposes; a long-term algorithm based on exponential moving averages of 50 and 200 periods, and the Slow Stochastic and Force Index indicators. The portfolio will use dynamic asset allocation whenever necessary.
While asset values are continuously changing, Groups A and B will always make a fixed 85%/15% share of the portfolio. Therefore, if a stock falls sharply, the portfolio has to buy more to keep that target of asset allocation. And it would buy as much as considered necessary as part of a disciplined strategy. Conversely, if a stock rises and then exceeds the set limit, the subsequent sale would be also mandatory, though well defined in terms of cash management.
It is most relevant to note that this is the right way to buy always low and sell high the required portion of the portfolio.
At first glance, it only makes sense to have a portfolio of this kind with a minimum financial investment of $100,000. So, a higher investment could stand to have greater diversification through a larger number of companies. For a good number of investors that might be more appropriate, but it will be always an individual decision according to risk management.
A diversified portfolio of companies is important given that the risk is necessarily reduced. However, what is really crucial is the choice of solid large companies in different sectors of activity. It is essential that they have a good management team, sustained growth capability, profit making potential and, desirably, stock appreciation over the years. While we must have confidence in the assets we choose to invest in, it is essential to closely monitor its progress.
Another aspect that is extremely important is the duration of the portfolio. Certainly, it will be built to the very long term, where all capital gains and dividends are reinvested. Nevertheless, I will consider selling a stock once the analysis implies that this is the best solution to the profitability of the portfolio. This will be a timely short-term move within a long-term strategy. Therefore, whenever a stock has risen more than 30% in a somehow exaggerated manner, 50% of its position may be sold. Concerning "fast growing" stocks, there will be greater care with the downside, cutting losses and selling up to 50% of a specific position when the fall is greater than 15% and closing the entire position when losses reach 25%.
Over these two years without any kind of dynamic management and with only 8 companies, the portfolio increased in value nearly 24%. This is a fair result in relation to the established goals. The chosen stocks had the following results:
a) Group A (around 11% appreciation)
Annaly (NYSE:NLY): +16%
Chevron (NYSE:CVX): -14%
Johnson & Johnson (NYSE:JNJ): +18%
McDonald's (NYSE:MCD): +30%
Vodafone (NASDAQ:VOD): +6%
b) Group B (around 34% appreciation)
Cornerstone (NASDAQ:CSOD): -7%
Himax (NASDAQ:HIMX): +50%
SolarWinds (NYSE:SWI): +58%
c) Dividend Yield for Group A
Johnson & Johnson: 2.7%
Only from now on I will have the time available to make the appropriate management of this portfolio. I will choose carefully the new companies to both Group A and Group B. I am satisfied with the results obtained, and I am convinced that with daily monitoring and active management, results can be much better. I hope you will join me in this work so that the 85/15 Portfolio can be a real guide for investors.
Note: This Portfolio has no real money involved. It only intends to be a guide for investors, and expresses my own personal view.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.