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If I Had A Million Dollars: A Case Study In Portfolio Management


Last week I updated readers on a dream portfolio, meant to represent how I'd invest if I had a million dollars.

The portfolio has performed quite well over the last year, but there are several companies that have question marks going forward.

Readers asked what changes I would make to improve the portfolio, and I now present six stocks to be swapped.

The new and old portfolio will both be tracked going forward, as a case study in the benefits and downfalls of active portfolio management.

Series Background

Last week I provided an update on my dream portfolio, presented in response to a reader's question on what I'd do if I had a million dollars to invest. That portfolio has done quite well in the year since it was created, but I questioned if I may have made a mistake in some of the selections, putting too much emphasis on "value" rather than performance with my picks.

As often happens, the discussion that followed it led to an idea for a follow-up article, as several readers asked what changes I would make to the portfolio going forward.

Looking back at the original article, this is what I stated as the goals of the portfolio:

this portfolio is for someone who is looking as much for preservation of capital as they are capital gains, so I will concentrate my efforts on high-quality stocks with high credit ratings and long track records, trading at a reasonable valuation...

My final assumption is that since this is either a recent retiree or someone investing a large lump sum of money, the individual is looking for an income stream from their investments. For this requirement, I will create a portfolio with an overall dividend yield of greater than 3%, which is roughly equal to the 30YR treasury yield and 50% higher than the yield of the S&P 500. I will also look for a blended dividend growth rate of better than 5% to counter the effects of inflation.

The portfolio has met the preservation of capital goal, as it has seen a 12.8% capital gain to date. It also met the income goal, with an initial yield of 3.59% and current YOC of 3.7%. However, it missed the mark with dividend growth, as it produced just 2.96% growth against the 5% growth goal; still not bad though as it beats the inflation rate.

Here is the original portfolio as it stands at today's closing prices:

As you can see, this is a diversified portfolio, but not what I would call a defensive one. It does have some defensive stocks in the utility and consumer staples sector, but also had five positions each from the energy and industrial sectors, both of which are suffering right now.

Reader Input Provides New Twist

Some stocks were selected primarily due to their apparent cheap valuations, and in last week's follow-up article, I questioned if I made a mistake in going that route:

I may be putting too much of an emphasis on valuation rather than performance, and may be missing out on opportunities because of it. I've been emphasizing health care and oil & gas stocks in my personal portfolio due to their perceived bargain prices, while I've avoided other potential investments that have been growing earnings but are trading at a premium.

I didn't elaborate much other than that comment, but "scoots" didn't let me off the hook:

I already write about my personal retirement portfolio here on Seeking Alpha, so my initial thought when seeing this request was, "Thanks, but No Thanks!" as I didn't see how writing about theoretical trades in a theoretical portfolio would be all that interesting. But after further thought, this actually seems like a perfect way to run a case study on portfolio management.

My plans now are to annually revisit the portfolio and make any trades I see necessary to "improve" the holdings. I will then continue to track both the original portfolio as well each successive portfolio to see if the trades that were made did, in fact, improve the results.

I do have a rather limited amount of free time, so I won't track every quarterly dividend received for each position, but I will track the capital gains from each portfolio as well as the projected income they will generate. This should be adequate to determine which portfolio performs better as time goes by.

Candidates To Sell

As stated above, the...