- A new rule to consider is selling when a stock falls by 10% or more below the portfolio return, even if the consensus recommendations are still strong.
- Outlook looks good for US markets, therefore an increase to a US ETF is warranted.
- US dollar is expected to rise further so US exposure is unhedged.
I was asked to write about what I would be doing with my SMSF share fund for 2015. Rather than just write about it, I first did it! I find it is so easy to fall into the trap of thinking of what to do when it is not followed by action – only to finish up finding out that one has only done half of the job. There is nothing like making trades to focus the mind.
Readers might recall from my November contribution [1], I was puzzled by the conflict between good broker forecasts and the poor price activity of Cardno (CDD) in my hybrid yield-conviction portfolio. Well, soon after I wrote that piece, the profit downgrade came – so I sold out. Naturally I made a significant loss but it would have been a lot worse if I had not sold then.
As a result of the apparent conflict, I have decided that, should something similar happen again, I will sell half of my exposure in the relevant stock while I am thinking. Downgrades can cause savage price cuts. My rule will be to consider selling when a stock falls by 10% or more below the portfolio return even if the consensus recommendations are still strong.
Since my hybrid portfolio was a little under a third of my SMSF equity exposure, and it was almost six months old, I was ready for a possible big rebalance. But the hybrid portfolio was doing very well – returning 3.9% (including dividends) to the close on the 15th December against a total return on the index of 1.9% so I wasn’t in a rush to run away from it. Incidentally, the stocks I sold in June to fund the purchase of my hybrid portfolio had collectively fallen 5.0%, also including dividends. I took comfort in the fact that events had supported my rebalance.
Going global
After the success I was also enjoying with my new international exposure via the iShares ETF for the S&P 500 (unhedged) – ticker IVV – which I also wrote about in November, I decided it was time to go international in my SMSF.
While my October 16th investment in IVV was up 14.7% to the close on 15th December, the S&P 500 was only up 7.5%. The difference is the contribution of the Aussie dollar currency fall! But, naturally, I first contacted my accountant to check that this ETF was allowed under my SMSF strategy!
To fund the purchase of IVV, I first got rid of the rats and mice that I had been a bit slow to eject from my portfolio during the year. But the main funding was from sales of Cochlear (COH), Commonwealth Bank (CBA) and Westpac (WBC). I really like these stocks and I had made substantial capital gains – but I needed to sell something ‘good’ as I had little cash and no ‘bad’ stocks left. That is the pain that comes with rebalancing. I still have substantial holdings in these three stocks after the sales but a little less than one fifth of my portfolio is now invested in IVV.
That leaves around 4% in cash and around 50% in seven blue chips (BHP, CBA, Cochlear, Rio, Santos, Westpac and Woodside). I am not panicking about oil prices. Santos and Woodside are long-term holds for me. Santos has a great long-term outlook and I wasn’t quick enough to get out before the recent price fall. CBA and Westpac are great companies but at least I am no longer ‘over exposed’ to any regulation changes that might affect the big banks. Cochlear has long been a favourite of mine for many years and it could benefit from any future currency falls.
So my New Year should be free from making any resolutions – at least financial ones. If BHP and Rio come back in price during 2015 – which I expect – I will sell down part of my exposures in those two and consider putting the proceeds in IVV – providing conditions still warrant the investment. In mid 2015 I will consider a big rebalance of my hybrid portfolio on its first anniversary which I might add to by selling even more of my blue chips to gain some more yield with growth.
So my key expectations for 2015 are:-
- Downward pressure on our dollar to continue – hence my leaning towards unhedged exposure in the US.
- A much stronger US economy compared to Australia – hence my leaning towards a material exposure in the S&P 500.
- The high-yield play to still have legs well into 2015 – hence my leaning to building on my hybrid portfolio exposure.
And I would like to close the year wishing readers a Merry Christmas and a very prosperous New Year.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.