Portfolio Review – November 2018 – Risk Tolerance

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Guys, it’s time to test your risk tolerance! The test is easy and it’s only one question!

Did you seriously consider selling anything in the past month? The market did have one the worst months in quite some time and there was a tiny bit of panic in the air. It’s not outrageous that those who haven’t been tested with a big paper loss might get scared.

How about you? Did you panic or were you calm as a cucumber? A month like October can certainly be a good test of your risk tolerance. If you didn’t care then good, your asset allocation is right for you!

However, if you were on the other end of the scale and October had you up at night worried about your money then maybe it’s time to consider a change in the risk profile of your portfolio. After all, a month like October where the S&P was down nearly 7% hasn’t been too common in recent years. That drop was even bigger for some riskier names as many individual stocks dropped quite a bit more. Hell, my high risk/high reward M1 Finance portfolio was down a bit more than 10%. High risk indeed!

The reality is that investors have been spoiled after 2009. There’s been little drama and little cause to fear. October’s drop was a small blip so it was no cause to panic. You might think otherwise but one has to consider the -6.94% October return wouldn’t even crack the top 20 daily S&P losses. It’s possible this was enough to spook some people but if that was the case then you likely fail the risk tolerance test.

Personally, I was glad to sleep soundly and bought more as my portfolio shrunk. It seems like these recent dips don’t last long so it’s hard to take advantage of lower prices and that seemed to continue this time as well as the market rose again after the mid-term elections.

The reality is that we’re still in the midst of a favorable market. According to factset, Q3 growth rates are 25.2% with 90% of companies reporting. That’s a pretty damn good rate of growth!

The S&P 500 was down in October but the overall results since the last update weren’t too bad as seen below in the graphic from Personal Finance.

risk tolerance

The S&P 500 was only down -3.62% since my last update. Foreign stocks continued to lag that while bonds, the safer alternative barely moved. After three months of trailing the S&P 500, my portfolio returns beat that benchmark. That’s because of my exposure to bonds and REITs which performed favorably. One of my largest holdings, UNH, had a great earnings call and rose quite a bit in the last month as well. Foreign stocks were still a detractor but overall performance wasn’t too bad given the market dynamics.

Year to date, the story is the same.

Despite the “carnage” in October, the S&P 500 is still very positive YTD. Foreign stocks have been nothing short of terrible this year. Despite that, this months performance brings me back to slightly better than the S&P 500 which is nice to see given the favorable risk profile of my portfolio.

The month might have been negative but overall YTD results are still fine. It’s never a bad year when your money is growing.

It’s also important to have a good mindset when stock prices are dropping. After all, that creates a great opportunity to buy things you wanted to buy a month ago for a lower price. It’s still the same share of an S&P 500 fund, you’re just getting more of it with your $500 investment this month.

My portfolio last month hit $556,651.35, a slight drop from the previous month so let’s see where it sits now.

The Portfolio

My portfolio now sits at $552,488.41!

That’s a small reduction of 0.75% against last month. Money kept flowing into the accounts but contributions weren’t enough to offset the loss in value.

Taxable accounts were down 1.95% as they more closely mirrored market performance and didn’t see a lot of new cash infusions. I also sold most of my Tencent holdings early this month due to uncertainty around government regulations. Tax-advantage accounts were down 0.33% as they saw more contributions to offset weak performance. I also used most of the Tencent proceeds to purchase international index funds in tax-advantaged funds.

Cash was up 1.9% and makes up 5.6% of my overall portfolio which is below my 10% max.

Purchases this month included more shares of BAM as well as regular contributions to 401k and IRA mutual funds.

The recent sale of Tencent shares meant I fully exited my individual Chinese positions as I just don’t feel comfortable with the government’s regulatory stance. I still have investments in China but transitioned all that money into index funds versus individual securities that have too much risk I can’t fully understand.

Overall, this wasn’t a positive month but my share counts keep increasing. That led to some great dividend months in September and October and I will continue purchasing whether the market is up or down heading into December.

Let’s take a look at my asset allocation now.

Asset Allocation

REITs and bonds showed strength this month and everything else did poorly.

Domestic large caps continue to be above target versus other classes despite the poor S&P 500 performance. That’s due to strong performance from my individual securities like MKL and UNH. The riskier assets like small caps fell behind and international continued to struggle despite more money flowing into that asset class.

Small caps are the new #1 laggard this month joining international developed as the two classes most in need of a cash infusion. My 401k will take care of the small cap imbalance and I’ll likely look to pick up some more shares of BAM for the international shortfall or just put it into ETFs.

I’m not at a point where I need to sell anything but will keep an eye on large caps if that continues into early 2019.

That means the plan for next month is as follows;

  • 401k contributions into small caps
  • Utilize cash to close up international shortfall

International has been a laggard almost all of this year but I’m hopeful that will turn around eventually. I have a long term mindset and sometimes, classes can take a long time to turn it around. I think the tariff situation will likely put pressure on international stocks for sometime so I’m not expecting a quick return on investment here.

My performance these last few months has been lackluster. I hit 550k on August 12th and have basically been there ever since. That’s not a big deal but it’s interesting to see how things can stall after a quick run up. It’s easy to get spoiled by monthly growth and then be confused when the market takes a break or starts to fall.

Sometimes, it’s good to take a pause and buy more at prices that aren’t always accelerating. If you’re in this for the long term then results like this aren’t bad. This is the second month in a row where I’ve seen my portfolio decrease. That’s not great but it’s the reality of investing. Things don’t always go up. They pause, go down or stay static and that’s what we’re seeing now.

It’s impossible to tell where we’re going to head next month. However, all I know is that I’ll just keep buying along the way.

That’s it for this month. Let me know how your portfolio did in November!

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