I was sorely disappointed when the Loyal3 investing platform was absorbed into FolioFirst last year. Sure it had disadvantages and limitations (limited number of stocks, only batch trade) but as in life, you get what you pay for. A transaction fee of $0 for a buy, $0 for a sale was nothing to sneeze at. With the monthly service fee FolioFirst wanted I figured I’d be ahead in the game by just transferring my shares to my regular broker and paying their $4.95 fee as needed (which isn’t monthly purchases with this group of stocks). I did look at other alternatives (RobinHood, Stockpile, WiseBanyan) but each had their own drawbacks to my way of thinking.
For all the procrastinators out there the deadline is near. In fact, this year I was one – completing mine yesterday. This season brings to mind some of the best practices compiled to minimize – or delay – the tax hit, thereby maximizing disposable income published by the Dividend Diplomats. Though geared towards wage earners, I can be considered a poster child of these practices as one migrates from the accumulation phase of investing. Over the years the use of many of these strategies have resulted in continued savings well into retirement. Case in point being a 2017 Federal effective tax rate of 8.04% on a six figure Adjusted Gross Income ($156 of which was earned income). Take advantage of all of the breaks provided in life as early as possible to reap the rewards (true in investing as well).
Below the shifting landscape that debates the notion as to whether tariffs are a negotiating ploy or the real deal, some pig farmers are now operating at a loss of thousands of dollars per week (futures markets have priced in tariffs) and soybean growers are considering whether to reduce their plantings to avoid the same fate. Meanwhile the impact on our NAFTA partners is also being considered across the borders. Canada can increase their soybean and pork sales to China but the net impact will still be negative to them considering the magnitude of trade volumes. Mexico is expanding ties to China in an effort to mitigate the ‘Trump’ effect. All the while, the administration has to be aware that China holds the ultimate ‘trump’ card in the debt held. Some bearish views posit US interest rates could rise to 14% if China ceases their bond purchases.
With these headlines staring at us, it would be excusable to have missed some of the underlying news – one being in healthcare. Two of my companies made the news this past week with possible or rumored deals; Shire (SHPG) and Humana (HUM). Takeda’s interest in Shire has all the appearances of industry consolidation, Wal-Mart and Humana’s discussions are more along the lines of being one of the last gorillas.
On a regular basis, articles are written regarding Sector Allocation. In a nutshell, this refers to the allocation of a portfolio across various business lines (industry sectors). There are several methodologies in use, but most use a risk tolerance/individual preference/age matrix to identify an investing strategy tailored to ones’ circumstance.
Last week I shared my International Allocation to close 2017, this week my focus will be how I allocated the portfolio between sectors. This is a composite view as I don’t currently differentiate between US and international companies. Also, my approach to investing likely differs from most in that I attempt to identify trends or situations that may prove to be profitable. Then I’ll run with the idea until the broader market adjusts its’ pricing. An example of this is Financials which represented 16.6% of my portfolio in 2015 on the assumption that it was ripe for consolidation. I added further in 2016 on the premise of rising interest rates. The market caught up with – and exceeded – my expectations with the election and hope for 2017 regulatory reform. I’m not much of a buyer now in this sector as frankly there remains little upside potential and I consider myself overweight. I continue to hold with the expectation of rising dividends through the stress tests, CCAR cycle and further interest rate increases.
The downside of investing based on a thesis is – unless diligent – the portfolio can quickly get out of balance. The upside is that if correct, you tend to beat the market. One could say it’s timing based on external events. So let’s first check my themes:
THESIS DRIVEN INVESTING
|THEORY||DATE||TTL RETURN||S&P RETURN|
|Small Banks||15 May 2014||76.1%||56.0%|
|Transaction Processor||29 May 2014||39.4% *||54.4%|
|Smaller banks||2 Sep 2014||60.6%||47.1%|
|Consumer focus||6 Jan 2015||72.2%||44.0%|
|USD weakness||25 Mar 2015||24.3% *||38.9%|
|Underlying Primerica assets||24 Dec 2015||22.2% *||38.4%|
|Coke bottlers||31 Oct 2016||19.7%||32.0%|
|Blockchain/China controls||14 Dec 2017||5.2%||3.0%|
|* indicates mergers or spins which distort reported returns. Of these, only Primerica lagged the S&P. The other laggard I suspect will be a beneficiary of the tax plan.
The ‘meat and potatoes’ of the portfolio resides in the ‘Anchor’ holdings which are targeted at 18% in total. These three issues have lagged the target for a couple of years (and are currently about 13.5%) hence my renewed effort to increase my KMB, CLX and WEC holdings this year.
Two other components factor into my 2018 thought process – free trades. In prior years, I performed a handful of trades in my brokerage account sometimes in 10 share increments, but more often in 25 or 100 share lots. This was done to reduce the percentage paid in fees to a nominal amount. My broker has placed 20 free trades in my account while Motif has implemented a no-fee option which I tested on Friday morning. While these no-fee trades exist I will probably execute more – but smaller – transactions, essentially filling in some gaps in my smaller holdings. This may also result in the sector allocation for 2018 seeing minimal improvement.
With the caveats out of the way, let’s take a look at my end of year sector allocations:
2017 EOY SECTOR ALLOCATIONS
|SECTOR||YE 2017||YE 2016
|Discretionary||24.36%||25.43%||will be reduced to 11.47% with 2018 sector changes|
|Financial||32.18%||29.29%||some of the increase could be considered Technology|
|Telecommunications||1.36%||1.55%||will be increased to 14.25% with 2018 sector changes (Communications Services)|
|Sector changes on schedule for September 2018
Basically little change from last year – a little heavier in financials. I’m hoping my purchase strategy reduces this to some degree, but I’m willing to wait a little further into the rate hike cycle before getting overly concerned. But it’s a little like herding cats – you get most of them heading one direction and invariably a couple dart another direction.
As I’m finished with my analyses for 2017, next week regular programming returns.
With the wild ride in the markets this week, I perused some of the community’s blogs to gauge the reaction. While not meeting scientific norms regarding sample size, I was surprised by the lack of reference to the pullback in 66% of them – including ones with posts as recent as yesterday. Perhaps it’s a lack of funds to take advantage or the deer in the headlights syndrome. One blog, Fully Franked Finance, had a timely piece a few days prior which stated the importance of a ‘shopping list’ – as many others also encourage. I too, engage in a strategy which emulates the ‘shopping list’ strategy. So, what were my moves so far this month?
Generally I refrain from back-to-back posts with similar topics but decided to make an exception this week as the moving parts have kicked into high gear. My post last week addressed my uneasiness with cryptocurrency as well as my interest in the underlying blockchain technology. It appears that my view has some support as two blockchain ETFs debuted on January 17th (BLOK and BLCN) and one January 25th (LEGR). This should be followed by KOIN next week. Horizons and Harvest (HBLK) also have ETF applications pending. Grenadier penned a piece on Seeking Alpha that did some analysis on the first two. Four of LEGR’s top five holdings are included in either one or both of the originals so it will probably be similar. David Snowball highlights this sentiment in his piece There’s no idea so dumb that it won’t attract a dozen ETFs stating, “…there are no publicly traded companies that specialize in blockchain; there are mostly companies with a dozen other lines of business that have some sort of efforts going into blockchain.” This is 100% correct.
As I wait for the last three dividends of 2017 to post to my account, my final accounting report will delayed into next week. Sure I could just accrue said dividends and release the report but where would the fun in that be? Especially since I can lay claim to being the first official victim of the new tax plan, aka the Tax Cuts and Jobs Act of 2017. As it’s not even effective yet, I guess this is the first – of probably many – unintended consequences to emanate from this bill. This week I’ll also cover my last minute 2017 moves and my first 2018 activity. But first …