My portfolio – December update

It’s the last update of the year and the stock market rally continues to push portfolio values to new highs.

This year has really flown by and it feels like it was only yesterday that I started tracking my portfolio on this website. Now I’ve got a full year of portfolio data and have done a great job of bringing my portfolio closer to my target asset percentages.

The S&P 500 had one of the best months since the post-February dip rally as it was up over 4% in the past 30 days. Those of us who thought the stock market was overvalued a few months ago(myself included) have been surprised by the way the market reacted to the events of the past few months. There are still a lot of question marks around the market valuation and whether the optimistic earnings growth projected for 2017 will materialize.

I did some digging for my own edification and right now according to Factset, the expected earnings growth rate for 2017 is nearly 12% driven largely by a 345% growth rate in Energy(that might seem high but earnings shrunk 75% in 2016) and mid teens growth rates in other areas(and earnings reductions in real estate).

That’s generous based on the nearly flat growth rates since 2014 but apparently analysts are bullish on what the trump presidency means for certain industries. That puts the forward P/E ratio at a 17.1 against a 10 year average of 14.4 so it still speaks to an aggressive valuation of the market as a whole even if you feel that the earnings growth estimates are realistic. Tracking back to historical forward P/E averages, it means a potential of a 15% reduction in 2017 for the pessimist in all of us. .

I do like to look at that data like that but also like to look at how accurate these predictions have been in the past.

The projected growth rate for the S&P for 2016 at the same time last year was about 7% and we’re looking at flat growth in 2016 so about a ~7% miss on that projection. That assumes Q4 isn’t a blow out quarter across the board but so far it looks to be in line with expectations.

The projected growth rate for 2015 at the same time two years ago was 7.6% and the true growth rate was just shy of 1%. I think the trend I see is that analysts are often overly optimistic about the growth potential of companies in the S&P so I’m not putting much faith in the nearly 12% growth rate for 2017 or the forward P/E ratio of 17.1 but I’m generally more pessimistic than some others when it comes to investing.

A forward P/E of 17.1 becomes an 18.4 if we assume the growth rate projection is about 7% higher than what will materialize. This isn’t based on anything beyond two years history so it’s nothing to hang your hat on but does give us another data point to support the potential overvaluation of the market right now. An 18.4 P/E could potentially mean a nearly 25% reduction in prices if stock prizes normalize.

So what does that mean for me as an investor? Will I be making drastic moves to go 100% cash and wait for that 25% reduction for when stock prices normalize? I think you all know the answer to that just by reading the name of the blog.

There’s a lot of data points out there that lead you one way or another but the one data point I use is the historical return of the market in the long term. I still truly feel that the market will be up in the long run and that the best way to benefit is to stay in it through the highs and the lows.

Right now, it certainly “feels” like we might be at a high but I’m not certain of that nor is anyone out there no matter what they tell you.

P/E ratios and other valuation metrics may make it seem like the stock market is overvalued but they were the same way months ago and the stock market has only gone higher. Sure, the stock market could drop 25% and we could all say; of course it did because of the valuations getting out of control but what if they don’t? This might also be the lowest the market will be for the next 10 years as we enter an era of prosperity and selling now will mean missing out on all those gains. Even if you sell now and the market does drop; how will you know when to buy back in? The truth is and this is something I truly believe is that that you just can’t time the market.

My firm belief is that no one knows anything so it makes no sense to react to data points that may mean nothing in the grand scheme of things. If earnings growth is 15% next year and higher the year after then today’s prices may seem like bargains.

On the other hand, if earnings growth is anemic next year and stock prices tank then so what? If you’re worried about that scenario then you need to revisit your risk tolerance and see whether your stock allocation is right for you. There are plenty of people who started investing after 2008 and have known nothing but gains and quick recoveries. These are the people that really need to look at their portfolio and decide whether they’re comfortable with their stock allocation and comfortable with the potential of a 25%+ drop. If not then the end of the year is as good a time as any to make some changes and to revisit your investment plan to see if you’re still happy with your risk exposure. High stock exposure can mean a 50% drop in values in the blink of an eye and while there’s a high likelihood of recovery; there’s no clear timeline as to when that recovery will come so keep that in mind. The worst decision you can make from a long term return perspective is to sell low and then miss out on the rally when it eventually comes down the road(it may take a while).

Risk tolerance is a personal choice and is one of the reasons I have a bond allocation as well as an allocation to cash if I feel like the stock market values aren’t realistic.

It gives me a mental safety net and a sense of calm around my investments while allowing me to benefit from stock market gains and not make stupid decisions like selling when I “think” stuff is overpriced. It does add an element of market timing to my investment style but it’s an element I enjoy as a Finance professional and it helps me sleep at night so I’m OK with missing out on some potential long term returns to gain that.

I’ve thought stocks have been overpriced since the start of the year and I’ve been near my cash maximum since then missing out on some gains during the market rally but to me that’s worth it because I have the piece of mind that if the market crashes – I have some cash on the side and an allocation to bonds that will help me weather the storm.

It’s a two sided coin and a personal decision to make. High risk tolerance will always lead to higher returns AS LONG AS you actually have high risk tolerance and don’t just think you do. Selling at an inopportune time is the worst thing you can do for long term returns.

As I make this final update – I look back at my asset allocation plan and I still like what it allows me to do. It allows me to participate in the market at all times but have a safety net in cash and bonds for when I feel the market is too frothy for my liking. While that limits my potential gains – the cap on cash(10%) and low allocation to bonds(7.5%) means I’m still mostly invested in stocks which will generate good long-term returns for me as long as I can ride out the ups and downs of the market.

I always like to revisit my asset allocation every year to see if I want to make any changes and if my risk appetite has changed. At this point, I don’t think it has and will be keeping the same asset allocation for 2017 but may consider raising my bond exposure in a year or two after my portfolio size crosses a certain dollar threshold.

These past few years have been pretty much nothing but ups but I am ready for the downs if they do appear in the near or long term and that’s just as important as buying the right stocks for long term returns.

Speaking of ups – let’s take a look at my portfolio this month.

It’s the end of the year and I’ve reached a new milestone as my portfolio has officially crossed the 350k mark for the first time ever! I was super close last year but the growth in the market as well as the additional contributions finally pushed me over the edge.

My portfolio now stands at $366,849.90!

That’s an awesome total considering I started at 293k last December, dropped all the way down to 273k in February and is now up to 366k. That’s over 73k in growth in just one year and over 93k in growth from the lowest point. What a year! My portfolio has grown a good deal more this year than I took home after taxes – that’s pretty crazy!

I look forward to see what next year brings even if we dip below 350k again since this is a long term game and I’d get to buy more shares if they’re cheaper!

This month’s portfolio size saw an improvement of 5.01% over last month; the biggest bump since March. The S&P was up 4% in that same time frame so a lot of my portfolio growth was driven by market growth as my savings rate has been low recently due to higher expenses.

My taxable accounts were up 7.7% this month driven mainly by great performance from one of my core individual holdings UNH.

My tax-advantaged accounts grew 4.8%. Strong performance in the US(especially small-caps which are up 20% YTD) was offset by bad performance in bonds and mediocre performance in REITs and international stocks.

My cash was down 1.2% as I bought my usual ETFs and now makes up 8.3% of my overall portfolio. My cash stack actually hasn’t decreased that much but the portfolio has grown at a faster pace reducing the cash % on an overall basis.

November dividends were light but were reinvested to help future cash flow growth as every little bit counts!

Let’s take a look at my asset allocation for this month.

The goal this year was to get my asset classes closer to the intended targets. They were way out of whack at the beginning of the year so I feel like I did a great job on that front.

All of the asset classes end the year within 1% of the target with REITs being most off the mark.

I made some changes this month by opening a brokerage account within my 401k that will allow me some flexibility within my 401k as I can now buy anything there now.

I also made my first move into that brokerage account by selling off some large cap and moving it into REITs to help boost that asset class closer to target.

Opening up this 401k-linked brokerage account will allow me to better control my assets for 2017 since I can now remedy any asset deficiencies using 401k contributions which will continue to make up a good chunk of my overall contributions.

It’s always good to have that flexibility as asset choices in a 401k can be limited and fund ERs can be too high for certain classes and a 401k linked brokerage account allows me complete freedom to buy whatever funds or ETFs or individual stocks I want and still reap the tax-free growth.

Here’s a breakdown of where each asset class is this month versus the target.

  • US Large Cap at 42.5% versus 42.5% target(-0.03%)
  • US Mid Cap at 10.7% versus 10% target(+0.69%)
  • US Small Cap at 10.5% versus 10% target(+0.50%)
  • US REIT at 9.2% versus 10% target(-0.77%)
  • International Developed at 14.7% versus 15% target(-0.26%)
  • International Emerging at 4.6% versus 5% target(-0.40%)
  • US Bonds at 7.8% versus 7.5% target(+0.27%)
Overall not bad in terms of being where I want to be to end the year. I’m still a bit high on a few classes and a bit low on others but market performance will do that sometimes making being right on target rather impossible month to month. I’d like to get each target within at least 0.5% to the target soon.
Future contributions will be directed towards international funds and REITs to shore up the deficiency there. International didn’t perform poorly this month but the growth in US shares left those asset classes behind in the dust. International in general has been a poor performer versus US stocks in the last few years but that might mean there’s more opportunity there in the future. I’ve been moving some bond shares the past few months into REITs as well and that helped get that back to target but so has the putrid performance of bonds in the past few weeks.
The goal with any asset allocation plans is to allow a person to direct funds into classes that suddenly become under represented in the plan. That can often mean buying at an opportune time when the asset class is cheap and/or ignoring the other asset class when those have gotten a bit too hot. That’s one of the main reasons I follow a plan like this as it allows me to get a picture each month of how each class is performing and where future money should be directed.
I also still have most of my 2016 ROTH IRA contribution to make in the next few months. Most of that will go into REITs and the rest into any other assets that may be under their target at that point in time. If interest rates start going up then it might be both REITs and bonds that need a lift by then!
The plan for next month is as follows.
  • 401k contributions into international funds
  • ROTH IRA contributions into US REIT
  • Cash pile at 8.3% – invest in anything that looks fairly valued.
That’s it for 2016 – it’s been a good year to be an investor and hopefully 2017 is the same. The market has surged to all time highs and I’m hoping there will be more of that to come if earning projections are actually accurate this time!
Happy holidays everyone and see you all in a week for a savings rate update as well as some other content.

3 thoughts on “My portfolio – December update

  1. Hi timeinthemarket,
    Congrats on beating $350k this month! Not long until $400k now.

    Do you follow any particular rebalancing strategy e.g. once a year? I've been pretty bad at reaching my target allocation as my investments are in taxable so I've been avoiding cap gains. But next year I plan to reach my allocation and stick to it.

    Best wishes,
    -DL

    Like

  2. Congrats on passing the 350k mark!! Not too shabby indeed and onto the half million mark. I like the strategy of opening a brokerage within your retirement account, as I would love to have that option. My wife's account allows it, but it comes with a $120 annual fee, plus trade costs. I'm still weighing the pros and cons of it but that $120 fee is killer in a smaller account.

    Like

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