Another Rebalance of the Portfolio?

February 2024, Newsletter

In follow up to my last newsletter I have in the end done a complete rebalance of the portfolio. I also added 2 new stocks and sold off 2 others.  There is allot going on this month!

Why Rebalance 

There are many reasons to rebalance.  The most  simplistic reason is to ensure that no Sector in your portfolio gets out of line with the market wether too big or too small.  This is also true at the individual stock level as well, my apple position as an example was bought in 2012 and has grown to 11 times its original purchase price.  Had I not paired it down on a regular basis over the years it would have become the largest stock in my portfolio by far.  My returns would depend on one stock alone which is not prudent risk management.  

Another reason to rebalance is to strategically make Sector bets, in other words to purposely overweight/underweight sectors with the idea of outsmarting the market.  Very hot sectors like technology become expensive and risky, so why hold market weight when there are cheaper stocks waiting to have their turn.  The idea is always buy low and sell high even though these stocks can be out of favour for a while.

It was also time to unwind the last strategy, mostly because it was based on the big market drop in 2022. The market has recovered since then and the sectors and stocks that I added at that time have mostly done super well. I am likely too early with these changes but its time to move on.

House keeping is another portfolio task where sometimes a small position you thought was going to pay off does not and even loses money.  These can become irrelevant with time.  Having too many stocks in a portfolio can be a time waster and also limits your upside.  Same goes for positions that exceed 5% of the portfolio.  Time to pair these down and lower your risk.

I usually do not like rebalancing too often because it often works against you.  I generally like to set up a portfolio and sit back as long as possible.  The problem is that the market is always evolving.

The New Strategy

Developing market strategies is difficult.  No one knows what the market will do for certain at any one point in time or more specifically which stocks will go up, which will go down.   Any strategy needs some basis in logic, for me, human psychology is a great place to find strategies as the market moves on human sentiment such as fear and greed.  Any big move that is purely emotional like a crash for no apparent reason is a good opportunity to bet against the herd. 

2024 is a less obvious year to set up strategies.  I suspect that its likely going to be a bumpy ride yet finish positive.  That being said, I want my portfolio to be bullish, yet not as bullish as last year’s version.  Gone is the 3% leverage and the overweight Communications Sector.  My strategy is simply to underweight (a bit) the very expensive areas like Communications and Technology.  As well as overweight beaten down areas like Utilities and Financials to a lesser extent.  

The other part of the Strategy is the country breakdown.  Understanding that the world is a big place, diversifying across countries is truly a great method to lower your risk with little to no difference in longterm returns.  USA stocks have been on fire over the last few years.  Typically this is not usually the case historically.  If you believe in reversion to the mean, which I do, you can imagine that other countries will either catch up, or alternatively the US markets will fall back down.  In any case, the argument is that there are cheaper alternatives out there to US technology.  As it stands, I currently have a USA/CAN/Foreign breakdown of 41/36/23 respectively.  Noting that most World ETFs have USA weighted at about 60% or more.

The Issue with Strategies

All strategies are deviations from the market.  Returns will therefore be different, either good different or bad different.  The amount of return really comes down to how far one deviated and how correct your assumptions were. There are so many variables at play including luck that it does not take much to make you a loser or better, a winner.

What could happen in 2024?

Maybe nothing; the market can simply continue its crazy concentrated 7 stock charge with Apple and Microsoft alone representing about 10% of the market weight each.  This is what in fact the market has done in January.  As a result the new strategy is already underperforming!

Another possible outcome is that the entire market could rise while the Magnificent 7 stalls.  This will result in the portfolio outperforming. This is what I am hoping for and often happens historically.

The economy could also fall into a recession causing a moderate to strong fall in the market.  The portfolio would likely outperform in this scenario.

International stocks could outperform USA stocks.  If so, then the portfolio will outperform. 

Rates could fall.  The portfolio outperforms a bit.

Maybe a different market rotation might occur, maybe small caps become the new thing.  The portfolio would miss out and may or may not outperform.

As you can see above, there are all kinds of situations that can affect a portfolio.  These are just the big ones, there are all kinds of forces known and unknown that will determine the future.  That being said, if you want to outperform but not lose your shirt, you cannot stray too far from the Market. This is why I am careful with the Portfolio. If I am wrong, parts of the portfolio will still do reasonably well and hopefully I can make up the difference in another year.

Will the New Strategy Work?  

Not at the moment. Maybe later? That is the thing about investing, you may have a great strategy but it simply could be wrong or just have bad timing.

I am hoping that now that the market is back at its highs that other parts of the economy will lead.  If this is true then the portfolio will outperform.  Either way, I believe its best in the long run to stay well rounded even if it costs a few points of performance.

Tactical Changes

Many of my changes to the portfolio this month were simply rebalancing from one area to another.  However, I have taken 2 new positions and added to one of my existing positions:

1. Norsk Hydro a Materials stock that replaces Omega Flex.  This company is a boring, big, old, foreign (Norwegian) aluminium producer, pays a good 8.3% dividend and out of favour. 
2. Axos Financial adds to my financial sector.  Its a small cap USA bank, scores really well on most screeners.  The idea here is that financials will continue to be out of favour but in the long run they will do well in a higher interest environment.
3. Fortis (FTS) a Utility which I took a small position in a previous Newsletter is now a much bigger position.  I actually doubled the SP500 weight of 2.36% for utilities and own about a 5% weight.  If you recall Utilities are interest rate sensitive, so should rates fall, Fortis will do very well. If nothing happens to rates, then I will continue to get 4.3% dividends well as any annual increase in dividends. Should rates increase, the stock price will likely fall. So this pick is mostly about rates.

Marc’s Monthly Moves

Sell

• Omega flex (OLFX) -10% return
• TD 50% return
• Netflix (NFLX) 52% return

Partial Sell  

• Apple (Appl) 1000% return (not a typo)
• Shopify (SHOP) 83% return
• Intel (INTC) 67% return

Buy

• Axos Financial (new position)
• Norsk Hydro (NYHYD) (new position)

Buy more of

• Google (GOOG)
• Fortis (FTS)

Marc’s Portfolio YTD Performance

• Portfolio return: 3% (including currency gains)
• Portfolio return: 1.32% (without currency losses)
• S&P 500 return: 3.96%
• RSP ETF S&P equal weight: .22%
• TSX: .6%

The portfolio is underperforming the sp500 by -2.64%. But thankfully, it is doing better than the Canadian index, the average Sp500 return and the average international indexes.