Yep, it’s January. Time for reporting the performance of all my portfolios ranging from the oldest, the Jubak Picks (12-18 month holding period), to the Dividend Portfolio and the 50 Stocks (5 year holding period) to my one-year Volatility Portfolio and my newest Perfect 5 ETF Portfolios. For all of these portfolios but Jubak Picks, this is also the month for rebalancing and I’ll be reporting on that effort for each of these portfolios as well. I’ll work through this group as quickly as I can and I expect to have all–yes even the Picks portfolio–completed by January 15.
The indexes set a tough benchmark in 2017 with the Standard & Poor’s 500 stock index showing a total return (price appreciation plus dividends) of 21.64%. For the year the price gain on the 50 Stocks Portfolio came to 26.8%. The portfolio also showed a 1.28% yield for the year. The total return for the portfolio was 28.1% in 2017.
Frankly, though, I expected the 50 Stocks Portfolio to beat that benchmark since it includes a good helping of the big cap growth stocks that powered the index itself in 2017.
So, for example, the portfolio collected a 46% gain from its position in Apple (AAPL), 53% from Facebook (FB), 89% from Amazon (AMZN), 96% from Alibaba (BABA), 36% from Alphabet (GOOG), and 98% from Tencent Holdings (TCEHY) even though I didn’t add that stock to the portfolio until February 14, 2017.
Several other newcomers also juiced returns for 2017. Japanese robotics stocks turned out to be a hot play in 2017 with Fanuc (FANUY) and Nidec (NJDCY) gaining 23% and 38%, respectively, from my purchase date of July 11, 2017. (Long-time followers of this portfolio will remember that I moved to more active buys and sells in this portfolio and annual rebalancing of the entire portfolio in 2016. The return on the portfolio that year was TK. More active doesn’t mean very active in the case of this portfolio. I made only seven sells in the portfolio in 2017 and 9 buys.
That decision to begin annual rebalancing–by trimming winning positions and adding to laggard positions in the previous year so that the portfolio enters a new year with equal sized positions in each stock–also played a role in producing the very solid performance in 2017. Laggards such as Corning (GLW), Freeport McMoRan Copper & Gold (FCX), General Cable (BGC), Itau Unibanco (ITUB), Latem Airlines Group (LTAM), and Vale (VALE) were up 32%, 44%, 55%, 27%, 70%, and 61%, respectively. And since I had added shares to those positions to rebalance those holdings after lagging performance in 2016, I reaped big gains for the portfolio when those stocks recovered in 2017.
Not that every stock in the portfolio was a winner in 2017.
Some turned in such a poor performance in 2017 that I’m not inviting them back for 2018. That includes one stock that I sold out of the portfolio at the end of 2017: Allergan (AGN) down 34%. And several that I am keeping in this portfolio and will be putting new cash into with this rebalancing. This group includes General Electric (GE) down 45% in 2017, Chesapeake Energy (CHK), down 44%, and Schlumberger (SLB) down 20%. What’s the difference between the two groups? In other words why sell out of some losers but keep others and indeed put more money into them?
The distinction goes back to the core investment criteria of the 50 Stocks Portfolio. In picking these stocks I looked for companies that had a long-term (five years or more) competitive advantage. That didn’t guarantee that a stock would never have a bad year–Schlumberger, for instance, is suffering through an extended downturn due to falling investment by oil companies in deep water exploration and development. But if I had indeed identified a real, long-term competitive advantage, I could expect to see these stocks recover and indeed jump to the front of their sectors when the economic sector in which they did business turned around. On that basis it’s worth keeping General Electric, Chesapeake Energy and Schlumberger, but not Allergan (which seems to be squandering the edge given the company by its Botox franchise) or BHP Billiton (BHP(, Yamana Gold (AUY), and SolarPower (SPWR) even though those stocks finished in the black in 2017. They just don’t meet the competitive advantage hurdle anymore.
Therefore instead of putting more money to work in these stocks–which I sold out of the portfolio at the end of December–I’m going to be looking for a gold miner with better competitive strength than Yamana and a solar niche player with a better chance of competing against Chinese solar companies than SolarPower. I’ve already added mining companies in lithium and copper to replace BHP Billiton. And I’m going to complete the transition in that sector ahead of my rebalancing by moving Freeport-McMoRan Copper and Gold to my 12-18 month Jubak Picks Portfolio because I think the situation in Indonesia, the site of the company’s biggest mine, makes it impossible to look far enough down the road for the stock to make the cut in this portfolio. I’ll be writing up Freeport McMoRan’s fundamental prospects and making that switch later today.
I’d also note that several stocks in this portfolio are on what you’d call probation. I suspect that, in these cases, a company’s competitive advantage is slipping away but the slippage isn’t yet totally certain. In this group I’d put Enbridge (ENB), Cemex (CX), and Bunge (BG). The stocks look like they’re priced attractively enough so that they are likely to make money in next year’s macro economic conditions. But I’m not sure I like the trends in the long term.
Al this gives me several slots to fill as I rebalance this portfolio with equal dollar amounts in each position. I’m not in any rush to fill those vacancies at current valuations. But the picks will be coming the next few months.
A final word on rebalancing.
Rebalancing this or any other portfolio gives you a chance to rejigger your asset allocations and your portfolio risk. For example, if you think this market is reasonably valued and the rally will continue for the rest of 2018 with a dip or two along the way, when you rebalance your 2017 winners, you can put all of those profits back into the portfolio and just spread them equally among all your remaining positions so that you remain fully invested. Or, if you worry that this market is excessively expensive, when you sell some of your Amazon or Tencent to bring those positions down to the size of the portfolio average, you can set the 2018 value of a position at just the same cash amount that you set at the beginning of 2017. That turns the gains from Amazon or Tencent into cash that you will use to equalize positions across the portfolio (by topping up your Schlumberger position after that 2017 loss) and into a cash position that you keep on the sidelines. In other words deciding how much of the realized gains from 2017 you put into rebalancing the positions in this portfolio is an important decision that should reflect your sense of valuations and risk in the market for 2018.
Rebalancing isn’t a mechanical and automatic position. It should reflect your best thoughts in current valuation and the likely trend of the global markets and economies going forward.