The Re-balancing Act



2018 is definitely here and the S&P keeps chugging along higher and higher without hesitation. Now everyone knows that this can't keep going on forever but what can happen is a continual push for much longer than a lot of us may think. With this in mind it is time to take a look at my portfolio and analyze exactly where I will make my next purchase. 


Currently The Dividend Fund sits with a yield of ~4.5% and a yield on cost of a nice and even 5%. This of course isn't a mind blowing yield if you consider yourself a high yield investor but is rather generous in terms of the overall market and the general safety that I believe that I have built in to the fund. But as always there is the question about what to do next. 

If you read my last Monday Musings post then you will see that currently my re-balancing is still at least a couple of months away from having the ability to sell any part of any of my positions. This means that I will need to be creative in my balancing and try to find small cracks in my current portfolio to fill with financial mud.

So what does my current situation look like in terms of breakdown? Well according to a quick X-Ray look by Morningstar (which you can find below) I am highly skewed towards large value companies with my largest weight being entrenched in the Consumer Cyclical. This is no surprise for me as I have been loading up on that sector over the last 6-7 months because I saw an opportunity for value. Also I have a large weight (>80%) in US companies. This is obviously something that I would like to address in the near future. Also with 100% weight in equities it seems that I may need to soon take some shelter in bonds.

So the real question is how do I re-balance the fund without actually doing any selling for another few months? Well that is Elementary, my dear Watson. All you need is a plan.

If you scan back to another post of mine that outlined the fund weighting (here) you will see that my goal is to have 40% weight in High Yield, 30% in "Bond Stocks", and 30% in my Dividend Growth category. At writing I am actually high on the high yield and low on the other two. Why? Because in this market there is not a lot of bargains in the other two categories, at least in my opinion. 

So what does my plan look like then? Here you go: 

  1. Raise my weight in the growth and bond categories.
  2. Increase my yield on cost of the High Yield category. 
  3. Add some safety nets. 

Okay let's go ahead and jump right into how I am going to implement my three tiered plan. 

The first is very simple. I am going to look to add more shares of companies that either I already own in these categories or add a new position. To be honest it most likely will not be the latter unless we see a large pullback in the market.

What in my portfolio do I believe currently sits at a value? I continue to believe that AT&T (T), Owens & Minor (OMI), and Old Republic International (ORI) are undervalued. I also would like to add at least 1 more position to these holdings, which I will write about in the near future.

The second bullet point will be accomplished by adding not to my already owned positions but instead by adding something new. What you may ask? Well one thing that is currently getting cheaper in the market due to a fear of rising rates are REITs. This brings along a great opportunity to add to my portfolio. Also I would like to add at least one high yielding BDC, or business development company. This will help to round out any declining yield concerns that I have when increasing my weight of dividend growth stocks. 

What am I looking at? Well I do think that Medical Properties Trust (MPW) is still undervalued and I really like a BDC called Ares Capital Corporation (ARCC). I will write in the near future about these as well.

 The third and final bullet point is probably the trickiest of them all but let me go ahead and try to answer. I believe that first and foremost selecting the right banks may be a short term answer to the rising interest rate fear. Along with this I will most likely add bond ETFs (both total market & corporate). I believe that if/when This market begins to turn, Vanguard (and others) will point their clients money from the index funds to the bond ETFs and you will see a spike in price. I will begin investing in these soon to capture high yield on cost. To also offset an impending move of money from the US markets I will be increasing the weight of my foreign holdings. 

What are my targets for this point? Well in terms of Bond ETFs I do like Vanguard's offerings because of the extremely low expense ratio that comes along with them. Three bond ETFs that I like are BLV, VCLT, VWOB. All three are long-term bond ETFs but range from government, corporate, and emerging market bonds. Also all sit at a very attractive yield. 

In terms of foreign position I currently hold very few. While Nokia (NOK) is more of a speculative play that I do not want to add much more weight in (same with XIN), I do feel comfortable putting more money into China Mobile (CHL) as well as BP. Otherwise I am pretty much looking outside the portfolio to add. What I am currently researching to add to the portfolio includes Vodafone (VOD), Unilever (UL), and Teva Pharmaceuticals (TEVA). All of which I will, again, write about here in the near future.



I hope that I gave you all a look at how I am going to re-balance the fund in the upcoming fiscal year. Remember before you crush me in the comments section that I am not selling any portion of any positions for at least another couple of months so I must be creative in my efforts. 

As always feel free to leave comments below!