Stock Portfolio Tracking Using Part Selling

Is about portfolio rebalancing of your personal stock portfolio!

Stock portfolio tracking is necessary to minimize the risks of unwelcome events such as a double-dip recession. You can protect your personal stock portfolio from these events with effective stock portfolio management.

The recent stock market crash and economic recession created a serious dent in investors' stock portfolios. There is a way to minimize the effect of the next market crash on your stock portfolio, and take advantage of it as well.

Why you need a cash stockpile

Don't be caught with insufficient cash holdings (or a bloated margin loan) when the next correction happens.

The following portfolio re-balancing strategy provides a means to encourage you to build up a supply of cash as the market recovers from its current woes and eventually overheats.

Why is it important to be thinking of starting to build up a cash holding now? The answer is that you don't know when the next stock market crash or correction is going to happen.

It might be tomorrow! You will need the cash to pick up wonderful businesses at bargain prices.


Using a percentage weighting for each stock

The strategy is to use the percentage weighting of each of your stock holdings to the total portfolio value (including cash) as a guide to re-balancing your holding of individual stocks over time as the market recovers.

A 10 percent weighting for each stock in your portfolio would imply a portfolio size of 10 stocks. As I have more time, I use a weighting of 5 percent for most of my stocks with a few others weighted at 10 per cent to give a portfolio size of 17-20 stocks.

I find that 5 and 10 per cent benchmark weightings keeps things simple rather than having a different percentage weighting for each stock.


Main aspects of the stock portfolio tracking strategy

The main features of the strategy are to ...

• build up a stock portfolio to the desired size and weighting for each stock over time by focusing on undervalued larger companies with ongoing high return on equity, manageable debt and respected managers
• part-sell over time those stocks that significantly exceed the desired weighting in order to move them back to about the desired level
• keep the cash from sales of your stock quarantined in an investment account as an integral part of the portfolio. This is an important aspect of the strategy. What I am trying to say is don't spend it!
• reduce any margin loan (if you use one) to zero as the market recovers so it will be available when the next correction occurs.

For my 5 per cent holdings, I commence part selling to re-balance the portfolio when the stock weighting passes 6 per cent. For my 10 per cent holdings, I part sell when the weighting passes 12 per cent.


Assumptions of stock portfolio tracking

The overall portfolio value will increase over time as the market recovers. The cash holding as part of the portfolio will also increase over time as a result of the part sales.

Stocks whose prices increase at a greater rate than the rest of the portfolio will be part sold first - even the ones that are loved the most! I try to buy stocks in about three lots so that I can part sell in about the same number of lots.

A specific stock that under performs the portfolio will reduce its portfolio weight over time and so cause less damage to the portfolio if it gets into difficulty. It may be sold off at a loss if it doesn't perform after two years.

This may make room for brighter prospects if they offer value and there is room in the portfolio. Otherwise, building up cash is the name of the game!

When the market overheats, some stocks may end up being sold off completely, as the limited number of shares now held as a result of previous part sales of the stock may preclude a further part sale.

On the other hand, the market may become range bound; that is, may oscillate up and down over time - as it is likely to in 2012.

I then consider buying back stocks when they drop to 4 per cent of the portfolio value, or 8 per cent if a 10 per cent holding has been set for that stock. This assumes that I still like their story and consider them to be undervalued.

This allows for the portfolio to be re-balanced up to the desired holding for that stock, whether it be 5 per cent or 10 per cent.


Outcomes of the stock portfolio tracking strategy

When the next correction occurs, as it inevitably will, the portfolio will be a sold-down version of its former self, with a large proportion of the portfolio in cash.

I may even become a stock investor with no stocks in my portfolio if the next bull market goes on further than anticipated.


To Conclude ...

This discussion has considered how to make a portfolio by building each stock holding to a desired portfolio weighting.

The stock portfolio tracking strategy provides a mechanism that encourages the part sale of profitable holdings as they get out of balance with the rest of the portfolio. This allows for cash to be slowly built up.

Falling in love with stocks was never a good idea when value investing. So I tell myself that I will love my favorite stocks more when I buy them back later at bargain prices!

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