I thought it’s worth sharing my portfolio allocation strategy. It’s something that I’ve constructed a while ago and I’m still fine-tuning it from time to time.
Before I’ll dive into the details, I’d like mention that I’m conservative by nature and therefore my recommendation is to first build an emergency fund for a rainy day and pay-off all your high interest debt first to avoid getting in trouble when you’d purely need to depend on your stock portfolio. You never know what’ll happen, you might lose your job, be faced with a high medical bill or any other unpleasant financially impacting surprise.
Also, there exist many strategies regarding portfolio allocation, i.e. Bond/Stock ratio depending on age (100 minus your age to derive the percentage that should be allocated to stock in your portfolio). I believe that those are very valid strategies and who am I to challenge those? I’m not an economist who’s gained a PHD on this topic. I would advise you therefore to do a little bit of research on this yourself first.
Ufff, I’d had to get that off my chest and now I feel good again 😉
When it comes to myself, I’ve established already a pretty decent situation with having built up enough cushion so that I’m willing to invest almost all of my new cash in stocks. Therefore this article is also focused on the stock part of my portfolio.
I personally believe that my allocation strategy is very straightforward, definitely not academic and it consists only of the following considerations: number of portfolio positions, categorizing them in tiers, diversifying per industry and looking at the region of origin.
Number of positions
I’m not bothered really by the amount of stocks rather than that I want to be in a position to be able to monitor them without spending dozens of hours per day. That’s why I aim to limit my portfolio to a maximum of 40 positions. There are theories that you wouldn’t need more than 10 stocks in your portfolio from a risk point of view, but I wouldn’t feel comfortable losing 10% of my dividend income because a single company cuts their dividend. I can mentally carry a single dividend cut which would cost me between 0.1% and 5% of my dividend income knowing that other companies with their yearly increases would cover that gap. An example was GE’s dividend cut which didn’t stop me from growing my yearly dividend income.
Not every stock is the same…
Some are slow growers, other high-growers, some have a very large moat, others a small moat ad so on. Hence why I’ve categorized my stock in 4 categories which I’ll call tiers.
- Tier 1: 10 stocks with a total sum that equals 40% of my portfolio value and dividend income
- Tier 2: 10 stocks with a total sum that equals 30% of my portfolio value and dividend income
- Tier 3: 10 stocks with a total sum that equals 20% of my portfolio value and dividend income
- Tier 4: 10 stocks with a total sum that equals 10% of my portfolio value and dividend income
Looking at those tiers, you can argue that tier 1 are my stocks that form the foundation and those are naturally the ones that I’ll focus most of my attention to. If a stock gets categorized in one of those tiers, then it doesn’t mean that they can never change to one of the other tiers. I’m often re-evaluating those categories, because from time to time something happens to the fundamentals and the future prospects of a stock (whether it’s positive or negative) and that might influence my thinking about the given stock and whether it’s categorized in the right Tier.
For me the nice thing about classifying it like this is that its makes me call out what are my foundation stocks, but at the same time it allows me to keep an eye on stocks that have the potential to become a cornerstone in my portfolio (i.e. Tier 3 and Tier 4).
Diversification is also important from me to mitigate the impact of a certain sector being in trouble (i.e. banks during the financial crisis), hence why i’m also tracking how much % of my portfolio I’d like to see in a given sector. At the same time it allows me to “discriminate” between industries, because when looking at the future and the world then I’m having a natural preference to be overweight in certain industries and underweight in others. For me the % allocation per industry looks like the following:
As a rule of thumb, I’m having an approach of having maximum 2 stocks of a given industry in a single Tier.
Looking at the above table is a result of me being a conservative investor. Consumer Staples are known for being defensive and downwards protection during a recession. This makes sense, especially as per Maslow’s theory. People naturally just choose food over jewelry during tough times.
Also the Healthcare Industry is an industry that I’m a huge believer in. I know that many investors might be a bit anxious with the upcoming US election and what Medicare for All could do to the healthcare industry and definitely there’s something seriously wrong with drug pricing in general and especially within the US. But I’d like to look at the healthcare sector as a very interesting industry, just think about the impact that biotech had in the last 2 decades? Some cancers are simply just curable nowadays which wasn’t the case when our grandparents lived. And we’ll need more and more healthcare as to date the global population is still growing and we’ll suffer more and more from complicated diseases as time progresses. Therefore, in the long run I truly believe in the blue-chips in this industry.
The other industries have similar stories, but as you can see, i’m not a strong believer in REIT’s (I simply don’t understand enough of it), Materials (too few companies that I know of), Utilities (not in my area of interest) and Financials (2008-2009, do I need to say more? ;-)).
Europe vs America and other regions
As the title of this blog suggest, I’m a dividend growth investor based in Europe. Therefore I’m also looking into building up positions from stocks listed in Europe. Those companies are typically easier to understand for me, because I often recognize their products and services quicker. They are also easier to follow in the news as they’re often mentioned there. At the same time it limits currency risks although that’s rather an interesting side-effect. Having said that, there’s not such focus from management of European companies on shareholder return like US companies, so it does take more effort to find those European companies simply because it makes the pond that we fish in smaller.
Therefore, the allocation % of European dividend growing stocks that I aspire is minimum 30% of my portfolio.
My future Portfolio Allocation aspiration
Let’s have a look then at how I’ve designed my portfolio allocation strategy! I don’t have invested yet in every stock listed here, more about that another time, because some stocks have not met my fair value criteria yet for which I find them worth buying. Honestly, I’m just crossing my fingers for a mild recession coming up as stocks that are listed here at this moment in time (Jan 2020) are quite expensive and often times provide a relatively low dividend yield.
|1||4%||1||SWX:ROG||Roche Holding Ltd. Genussscheine||Healthcare|
|2||4%||1||UNA||Unilever NV||Consumer Staples|
|3||4%||1||EPA:RDSA||Royal Dutch Shell Plc||Energy|
|4||4%||1||JNJ||Johnson & Johnson||Healthcare|
|6||4%||1||PEP||PepsiCo, Inc.||Consumer Staples|
|7||4%||1||DIS||Walt Disney Co||Consumer Discretionary|
|8||4%||1||MSFT||Microsoft Corporation||Information Technology|
|9||4%||1||AAPL||Apple Inc.||Information Technology|
|11||3%||2||EPA:AD||Koninklijke Ahold Delhaize NV||Consumer Staples|
|13||3%||2||NKE||Nike Inc||Consumer Discretionary|
|14||3%||2||SBUX||Starbucks Corporation||Consumer Discretionary|
|15||3%||2||CLX||Clorox Co||Consumer Staples|
|16||3%||2||PG||Procter & Gamble Co||Consumer Staples|
|22||2%||3||ETR:MUV2||Muenchener Rueckvrschrng Gslchft AG Mnch||Financials|
|26||2%||3||OHI||Omega Healthcare Investors Inc||REITs|
|27||2%||3||KMB||Kimberly Clark Corp||Consumer Staples|
|28||2%||3||UTX||United Technologies Corporation||Industrials|
|29||2%||3||INTC||Intel Corporation||Information Technology|
|30||2%||3||XOM||Exxon Mobil Corporation||Energy|
|32||1%||4||PM||Philip Morris International Inc.||Consumer Staples|
|33||1%||4||BBL||BHP Group PLC||Materials|
|34||1%||4||HSY||Hershey Co||Consumer Staples|
|35||1%||4||CSCO||Cisco Systems, Inc.||Information Technology|
|37||1%||4||UPS||United Parcel Service, Inc.||Industrials|
As you can see, I still have few open spots reserved in my aspired portfolio, so feel free to recommend a stock to me. I prefer European, because based on the above data I’ve got currently 26% reserved for European stocks.
This allocation strategy has been working for me so far. Monitoring these stocks on my watchlist also results in them popping-up from time to time when something happened that led to a certain investor sentiment and a related sell-off. Hence why in 2018 I was able to accumulate quite some ABBV and more recently to start a position in MMM.
I’m actually very interested to hear from you now. What do you think about my allocation strategy? Are there certain recommendations that you would give me? Do you share an overlap with my aspired portfolio? Any stock ideas?
Just let me know and feel free to leave your question / feedback in the comment section.
Follow me on my Journey!