Adding to My Portfolio
by Jim Stevens (JimStevens@aol.com)
Burlington, VT (February 1, 1999) -- I have been an avid reader of, and frequent contributor to, the ongoing discussions in the Workshop about holding periods for the various Workshop stock screens. For mostly personal reasons that involve the amount of my investments that are in taxable accounts and the number of mornings I want to (or can) spend with the nuts and bolts of trading my positions, I've settled into a mode of annual updates. That said, tonight I devote the discussion to my personal experience with one aspect of investing in the Workshop style.
Updating annually only left me one time in the year when I could make additions of new money to my portfolio. Since visions of Caribbean vacations, new couches, and big TVs dance in my wife's and my dreams when our cash-on-hand begins to rise, we need a commitment to and a method for adding to our long-term investments. Ahem... actually, the big TV was never in my wife's dreams, but it is now in our family room (pre-Super Bowl) after occupying my fancies for a long while. The new couch is next, I'm sure!
But I digress. Last year I made regular additions to my investments by paying down a margin loan in my taxable account that started out at about 8% of my total investments in December of 1997 -- that actually made the margin account about 14% leveraged at the start. This is a way to get money you KNOW you are going to be investing working in the market before you even have it. By October I had paid back the loan and began buying a new position each month, kind of a last third of a Keystone Dozen. Since the use of margin inherently makes one's portfolio more volatile, it's another element of risk that must be weighed when it is used.
This year, with the tax consequences of some 1998 capital gains and Roth IRA conversions looming, as well as my new Roth contributions calling, I was inclined to cut back on my use of margin leverage. It looks like I'll need all of my ready cash for taxes, and I'll have to dip into my margin account for some taxes and my Roth contributions. I don't want a possible market slump to put me any where near margin maintenance trouble. I'm a total chicken about this.
So what to do with new money this year, given that my margin method is on hold? I'm planning on converting (as the year goes by) to what I guess would be called the "5 each quarter twenty" method. Long-time readers will remember Robert Sheard discussing this as a method he likes. Since this will be the first year I'm doing it, I started out by picking a screen and spreading my money over what would have been 20 positions at the beginning of 1998. In reality I only bought 16 positions, since some of my money was in the process of being transferred from a mutual fund. I picked the Keystone screen, so some of the stocks were carryovers from my 1998 Keystone positions that just had to be rebalanced.
By April 1 I'll have the twenty positions, and I'll decide then what screen I want to devote that quarter to. Which brings me to what I see as another advantage of quarterly trading. If you decide you are ready to try a new screen, you don't have to wait a year to implement it. What I plan on doing the first year is selling my worst performing positions that aren't in the top ranked of my chosen screen come April, July, etc., then buying the highest ranked 5 I don't already own.
I guess there could be some short-term taxes to consider, but I'm hoping that any short-term gains taxes from selling the worst positions this year will be counterbalanced by better performances from newly high ranked stocks that I otherwise would have missed. Every three months I'll have a chance to put new money into my positions. After a year, I'll simply replace the 5 one-year-old positions each quarter. I'll probably go back to using a conservative level of margin with this method as well -- that is, except in the quarter right before that Caribbean vacation!
I've read with interest the excellent work on the message boards of Fools who have tested the "seasonality" of some of the screens, Keystone included. The tests I've read do suggest that some quarters are worse times to start an annual port than others. I may be wrong, but since I'm going to be holding twenty stocks throughout the year, I'm throwing caution to the wind concerning these tests.
This method is sort of a hybrid of the "dozens" and a straight annual model. After the first year, all my gains should be long-term. I'll have to trade more than once a year, but not twelve times. Which brings me to a thought I had while reading TMF Bogey's Jan. 29, 1999 Dozens Update.
When I looked at the suggested update of the Formula90 dozen of replacing the one-year-old position in Dell Computer (Nasdaq: DELL) with Charles Schwab (NYSE: SCH), it made me think. You might be inking only long-term gain on Dell, but given its number 3 current ranking in the screen, you might be buying it back soon. Hmm... hate to sound "un" mechanical, but some consideration might lead a Fool to look at different candidate from among the other 11 for replacement. Just a passing thought.
Have a great week!