Seeking Alpha

My IMF Portfolio: February And March Performance Review

by: Ian Bezek

My IMF portfolio climbed 3.1% in February and 0.3% in March. This slightly trailed the S&P 500 while keeping pace with the all-world stock index.

For March, banking shares were the big drag on performance.

Thoughts on position sizing, and why buying small positions frequently can lead to better results.

Checking in on the portfolio's yield and income potential in the coming years.

Ian's Million Fund "IMF" is a real-money portfolio that I've written about monthly since January 2016 here at Seeking Alpha. The portfolio is a largely buy-and-hold group of ~100 stocks. Each month, I buy 10-25 of the most compelling stocks available at then-current prices, deploying $1,000 of my capital plus accumulated dividends. If things go according to plan, this portfolio, began when I was 27, will hit one million dollars in equity in 2041 at age 52. I intend it to serve as a model for other younger investors.

My fund kept pace with the markets in February. The IMF rose 3.1%, versus 3.2% for the S&P 500 and 2.8% for the Vanguard Total World Stock ETF (VT). Since the portfolio lost less value during the fall correction than the S&P 500, the IMF found itself closing in on new all-time highs on a total returns basis well ahead of the market as a whole.

However, March wasn't enough to hit that mark. Given the portfolio's heavy exposure to U.S. banks (currently 19% of the overall portfolio), March was an underwhelming month. Bank stocks got punished as the yield curve inverted and investors fled the sector. As a result, the IMF was up just 0.3% on the month, trailing the S&P 500 at 1.8% and VT at 1.1%. That leaves us here overall with the S&P up 34%, my IMF portfolio up 28%, and the all-world stock fund VT up 27% since November 30, 2016:

Over the past two months, aside from the banks in general underperforming, there wasn't a great deal of excitement. Among holdings large enough to move the needle, consumer staples delivered many of both the biggest gains and losses. Top holdings McCormick (MKC), Brown-Forman (BF.A) (BF.B), Hershey (HSY), and Diageo (DEO) all ripped to the upside with Diageo, in particular, hitting new all-time highs. Meanwhile, thankfully, smaller positions in Molson Coors (TAP) and Kraft Heinz (KHC) counteracted much of the positivity from the other consumer staples. Make no mistake though, struggling food makers can't simply blame their sector for their problems as stock like Hershey head to new heights.

Until March, the banking sector had been delivering solid alpha. Long struggling top 10 position New York Community Bank (NYCB) surged as much as 45% from its November low before sliding back a bit in March. Regardless, the portfolio's second-largest income source is now back to around its cost basis as well. Overseas, large positions in Colombian stocks surged as that economy is doing alright and higher oil prices are kicking in. Still, outside of consumer staples, it wasn't an especially action-filled couple of months for the portfolio.

Here are the portfolio's top 20 holdings as of the end of March. Note that Brown-Forman is a much larger holding if you merge the portfolio's positions in the A and B shares (I received B shares from my broker during the latest stock split for whatever reason). If a stock is in bold, I added to it in the March IMF buys, if it is in green, it has been paid for with dividends, rather than my own earned capital:

On Position Sizing

With the market's recent gains, an interesting event occurred. For the first time ever, all of the top 10 holdings in the IMF were up on their cost basis for much of February and March, although the plunge in banking stocks knocked NYCB slightly back into the red at month-end.

In any case, this highlights one of the greatest strengths of building a portfolio gradually over time with minimal turnover. The rules of the portfolio force you to take a "water the flowers, not the weeds" approach to position sizing. Let me explain.

With most portfolios, people think in terms of managing overall position size. This often leads to investors incrementally selling their winning stocks as the position gets too big. Imagine how much money you'd have left on the table if you had a 5% position in Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) at the turn of the century and regularly sold your stake back down to the 5% limit when your holding got "too big". Trimming your winners, you'd instead plow that money into stocks that returned far less.

On the downside, position sizing makes it way too easy for people to lose a boatload of money on a stock that just keeps going down. Imagine you had a 5% position in GE (NYSE:GE) at $30 a share and then kept rebalancing your portfolio to get GE back up to 5% at $25, $20, $15, and so on. You would lose a fortune; despite it never being more than a 5% position at any one time, you could easily lose 10-20% of your overall portfolio this way.

As investors - and human beings in general - we often over-commit mentally to our favorite ideas, and lose outside perspective. It's not "bad luck" in many cases when investors take a massive loss in a stock, it's them getting blinded to the situation.

A portfolio constructed such as my IMF is largely immune to these problems. I commit $1,000 of capital each month to the market, rain or shine. Of that, I divide it into ten or more holdings. So I can't add much more than $100 to a position each month. With the portfolio now approaching $50,000, that means I can only add 0.2% of my portfolio to a position every month. It'd take me buying the same stock every month of a calendar year to get to a 2.4% holding on a new position.

This prevents the portfolio from getting enamored of any particular stock. I can't arbitrarily make a stock a large position in any one-time decision. If I want to establish a large holding, it will take months or years of deciding over and over again, each month, to buy more of it. This serves as a great brake to slow down potential bad decision-making.

So who selects the portfolio's largest holdings? The market. A large holding has to earn its keep by going up in value. Over time, stocks that go up become a much larger portion of the portfolio, while stocks that go down shrink away naturally. Since the pace that I can "average down" in a losing stock is just ~$100/month, a bad long-term holding simply can't take up a large portion of the portfolio even I make the headstrong decision to keep buying that dog every month.

The best example of this in my portfolio currently is probably Kraft Heinz. Based on the amount of money I put into it, it'd be my 20th largest holding. Instead, given its 40% decline from my basis, it's now barely inside the top 50 current holdings. On the other side, Diageo (DEO) would not be a top 10 holdings based on the amount of money I put in. But since it is up 54% on my basis, it has climbed well into the top 10.

Diageo, with its improving performance, has earned a larger spot in my portfolio. Kraft Heinz, with its strategic errors, has shrunk to a 0.6% position that can cause minimal additional harm to the overall fund. Given my portfolio allocation mechanics, I can't just double or triple down on it tomorrow because it feels cheap again. It would take many months of me buying it repeatedly - in spite of learning that my thesis has broken - to get it back toward my top holdings.

In the short-term, markets can do crazy things. Over the long haul, companies that continually deliver shareholder value will see steadily rising stock prices. Take a look at some long-term charts of holdings within my top 10:


Data by YCharts

At what point would you say, wow, that McCormick looks overvalued, I'm going to trim my position and put it in some "cheaper" stock? Or, even more tragically, imagine selling some shares of these companies every year to keep your position size under an arbitrary limit.

We hear all these hypothetical stories of investors turning $10,000 into a million by buying a quality company and holding for many years. But you will never achieve this aim if you let position sizing or valuation cause you to sell along the way. Great companies are often overvalued because they are great; investors want to own the best. Trimming your best holdings, or engaging in market timing gives up the shot at huge returns in order to try to get slightly more short-term gains. It's a dangerous trap.

I hope the IMF one day has a 25% portfolio holding. It won't be because I put much of my personal capital into it - remember, I can only add 0.2% to a position every month. But rather, it will be a huge holding because the stock has gone up many-fold and I never sold it on the way up.

Kiplinger's cited a report of stock market data going back to 1926 which should be sobering to anyone who turns over their portfolio frequently:

[The study] found that the average stock traded for just seven years and lost money (including reinvested dividends). In fact, the most common return for an individual stock over its lifetime was a loss of 100%. In other words, if you had invested in any one stock from 1926 through 2015, you would most likely have come away poorer. Only 48% of stocks delivered any gains.

Of the 26,000 stocks, a mere 1,000 have accounted for all of the profits in stocks since 1926. And just 86 stocks - one-third of 1% - were responsible for half of those gains.


In the stock market, it seems, there are a lot more strikeouts than home runs-but the home runs tend to be grand slams.

Checking In On Yield, And Thoughts On Compounding

We've probably all heard about how capital contributed at the beginning of your time in the workforce is worth a lot more - in terms of compound interest - than capital contributed later. The concept makes sense theoretically, but I'm not sure how much we really internalize the concept.

So here's a thought experiment. I intend for this portfolio to hit $1 million in value in around 2041 when I will be 52 years old. You can say $1 million isn't enough to retire on now, let alone after 22 years of additional inflation. That's a fair point - on the other hand, most 52-year olds are capable of continuing to work for a while as well.

But even if I stopped contributing today, barely three years into the operation of this portfolio, it'd already throw off a major chunk of retirement income. The portfolio is currently producing ~$1,800/year in dividends on my original $41,000 of contributions. The portfolio currently yields 3.7% and thus with 5% dividend growth annually plus reinvestments, we can project annual portfolio income going up 9%/year. Using the rule of 72, my dividend income doubles every eight years.

Thus, in 32 years - when I will be 62 - my dividend income will have doubled four times. That is to say, it will have gone up 16x. Think about that. Even if I never contribute another dollar to this portfolio, the IMF would be throwing off close to $29,000/year by the time I wanted to retire. Again, I know there's inflation, $29,000/year won't be enough by then - but it's still a considerable sum on just $41,000 of capital contributed during your twenties.

Think, by comparison, how much tax a millennial has to pay into Social Security over the course of their lifetime to get the same $29,000/year out of the government when they retire. If you're young and reading this, I urge you to start investing regularly, even if it's with a tiny sum of money. If you don't, you'll have to invest far more later in life to catch up.

Dividends Received: February And March

For February, the IMF's collected dividends nearly doubled year-over-year, thanks in large part to the portfolio buying much more of New York Community Bank and Hormel Foods (NYSE:HRL) over the past year. Those two companies alone made up nearly a third of February's dividends. Expect the growth rate on future Februaries to be slower, as neither of those stocks is a deep bargain anymore. In March, dividends were up a more modest 40% year-over-year. The 39% dividend increase from TFS Financial - the portfolio's largest yielder - was highly helpful, but I don't have that many other big payers in March:

Overall, the portfolio is running at $1,798/year or $150/month in forward dividends. Due to owning foreign stocks that tend to pay bigger dividends later in the year, the portfolio hasn't been hitting $150/month quite yet. However April should be a big month, and June should easily top $200 for the first time, as a lot of semi-annual payers deliver the goods then. It's worth noting that TFSL stock currently accounts for 8% of the portfolio's annual income; no other stock makes up more than 5%. Thus, the income stream is quite well-diversified.

For the sake of keeping track, I segregate the portfolio's holdings paid for with my own earned capital and the holdings that I purchased from received dividends. So far dividends have bought me the following positions with current values of:

  • Hormel Foods - $2,029
  • British American Tobacco (NYSE:BTI) - $252
  • Global Water Resources (NASDAQ:GWRS) - $210
  • Campbell Soup (NYSE:CPB) - $177
  • Altria (NYSE:MO) - $120

In all, the stocks that dividends bought are already creating $75/year of dividends on their own along with nearly $500 in unrealized capital gains. Stocks purchased out of dividend money now constitute more than 5% of the overall portfolio. Compounding is a beautiful thing once it really gets going.

Disclosure: I am/we are long ALL THE MENTIONED STOCKS. 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.