50K Invested – A Strategic Approach

50K InvestedI recently transferred 50K from my employer’s retirement plan to my dividend portfolio and invested all of the 50K over the past month. I find it very easy to invest 50K, 100K or even 250K, and you will see that I only added two stocks to my portfolio in the process. There are no emotions and no chase for the next hot stock either.

A Word on Value

While the markets have been turbulent since the start of the year, my approach is to be invested and make my money work for me. Waiting for the markets to reach a low point is market timing just like waiting for a stock to enter a specific price range for an entry point. See the S&P500 and the TSX Composite below where dips occur very regularly over a 5-year period, but in general, the trends are up over an extended timeline. The same pattern below can be seen with individual stocks.

Market timing is not an approach I can do. In fact, not many investors can do it, and not many analysts can predict future earnings or value either. In the end, the odds are just not in my favor. Rather than focusing on establishing today or tomorrow’s value, I focus on the business and strength of the company with the understanding I can always average into my holdings and invest for the long term.

SP500 and TSX 5 Year Comparison
Source: MSN Money – 5 Year S&P 500 vs. TSX Composite

That is not to say I buy stocks regardless of their value. That is not the case as I use the P/E and FP/E with the opportunity score along with other metrics. Considering my time horizon is really long, and I am in the accumulation years, I can usually average my holdings over time as well.

Here is why my approach has worked for me so far. I have done quite well with Kimberley-Clark NYSE:KMB and not by market timing the stock but rather by taking profits when the value exceeded my sector target. Strategic sector targets take away the emotion or the gut feeling of executing transactions. When you look at the 5-year graph of KMB below, it seems like the stock is not going anywhere, but when you look at the all-time graph further down, there has been growth all along the way. Will you be patient or chase the quick profit?

 

KMB - 5 Year Stock Graph
Source: MSN Money – KMB 5-Year Graph
KMB - All Time Stock Graph
Source: MSN Money – KMB All-Time Graph

Strategic Investing Approach

With a sector target approach, you are able to take a profit at the peak and deploy it to another holding. Should you completely exit the position? That depends if you have a replacement for the sector or if your sector has gained so much that you could sell all to the benefit of another holding. I do exit positions and that’s usually after reviewing the entire sector and assessing there is a better holding for growth. More so if the dividend growth rate is trending down.

When adding 50K to a portfolio, it’s normal to expect each sector to need some money to maintain the ratios but you don’t have to approach it that way as long as you are aware of your ratios. A rule I have is to not have more than 4.5% of my portfolio value into a stock so I avoid those that are over and focus on adding to those under if there is an opportunity. Another rule I have is to target a certain number of stocks per sector based on my sector ratio and the 4.5% limit in one stock. The rules allow me to navigate my portfolio management process to reach a decision on the next purchase.

Decision #1

The first choice I made was to convert all of it into USD using my beloved DLR Norbert Gambit approach. The money is in an RRSP account, and that’s the best account for holding foreign US holdings with respect to the foreign withholding tax.


Decision #2

If you follow my dividend income progress, you will be aware that I have some sectors that are in need of an extra holding to support my target number of stocks per sector. As you can see below, the technology and healthcare sectors are in need of an added holdings.

Sectors Target # of Stocks # of Stocks in Portfolio
Basic Materials 0 0
Communication Services 2 2
Consumer Cyclical 0 0
Consumer Defensive 5 5
Energy 1 2
Financial Services 4 6
Healthcare 4 3
Industrials 3 3
Real Estate 1 1
Technology 3 2
Utilities 2 2
Total 25 26

I did not go all in as there is also an expected amount to reach my target needed to meet the established sector ratios. The need to add an extra stock to each sector has been present for a while now and I have been monitoring the sectors for what I would find works for my portfolio. I had a couple of options narrowed down and ultimately decided on Texas Instrument NASDAQ:TXN and Becton Dickinson NYSE:BDX. Those represent the new holdings to my portfolio.


Decision #3

With my target number of stocks reached, my next step was to reduce the gap against my sector ratios. Since I had USD, it made sense to focus on adding to existing USD holdings which are all I have in the RRSP account anyways.

I track the sector ratios through my portfolio tracker and below is the March 2018 update. As you should expect, adding money shifts the ratios and the day-to-day changes in stock prices also shift the ratios. I use the table to choose the sector to focus on and at the time of purchase, I added to the following holdings:

  • Industrial Sector – Illinois Tool Works NYSE:ITW
  • Healthcare Sector – Cardinal Health NYSE:CAH
  • Financial Sector – Visa NYSE:V

Sector Allocations - March 2018


50K Invested

And that’s how you do it. Simple right? Ok, I did not go through how I picked the actual stock but that’s also relatively simple. I use the Dividend Snapshot USD stock list and go through the following steps:

  • Filter the list by sector
  • Review the Chowder Rule
  • Review the 10/10 dividend growth rate
  • Review the 3, 5 and 10 year growth rate for positive or negative trend
  • Make sure the opportunity score is 60% or more
  • Make sure it’s a business I want to invest in

That approach really helps me narrow down to 1 or 2 stocks and then I start reading news and assessing which of the final stocks is better for my portfolio.