My investment thesis - 2016-02-10¢  Disclaimer everyone has different needs, strategies, objectives,

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  • My investment thesis…


    What portfolio management

    means to me

    Presented by: Michael Patenaude February 2016


    Risk tolerance

    Asset allocation Re-balancing




  • What we’ll cover tonight



    objectives, risk tolerance and asset allocation


    what I’m thinking of doing next

    wrap up


  • Disclaimer everyone has different needs, strategies, objectives, risk

    tolerances, and portfolio management styles but we can all learn from each other

    there are few right or wrong answers in investing – what’s important is what works for you and your circumstances

    the views expressed in this presentation are my own opinions as an amateur portfolio manager

    I am continually learning so don’t have all the answers (and never will)

    the information presented here is for general interest and is not investment advice


  • Context

    just me and my wife (and our dog) – no kids, mid-50s

    our investment process is customized to our requirements

    we’re both self-employed consultants project portfolio analyst (me) writer/media relations consultant (Rhonda)

    no pensions other than CPP/OAS

    self-directed investor for last few years (previously had a broker/investment advisor and gradually migrated to self- directed portfolio management)


  • Context (cont’d)


    we have $CDN and $US: RRSP TFSA cash accounts two discount brokerages managed as a single portfolio

    I keep a home-made, detailed Excel workbook for our portfolio and other financial information

    whenever I feel like it I download account data from the discount brokerages to my spreadsheet and analyze it

  • Strategy

    develop a portfolio “for all markets” very loosely based on the permanent portfolio (Harry Browne, 1980s) that balances growth, income and safety

    for equities, invest in solid businesses at a fair price (e.g., with a moat): long-term proven performance well-founded future prospects great management teams

    don’t act upon day-to-day “noise” in the financial press or short-term changes in prices of assets


  • Strategy (cont’d)

    do not “chase” yield or growth – sometimes the train has left the station and it’s safer to wait for the next one

    do look for consistent, long-term performance (and in some cases dividend growth)

    plan diversification carefully – try to avoid excessive asset value correlation

    accept that not all investments are likely to work out but if enough of them do that’s fine

    let winners run (up to a point then trim a bit)


  • Strategy (cont’d)

    avoid high fees, management expense ratios and commissions

    take emotion out of investing so as not to be driven by fear and panic and/or greed and euphoria

    recognize about all you can control are: objectives risk tolerance asset allocation


  • Strategy (cont’d)

    according to numerous studies the recipe for success in investing is (although this is often hotly debated): have a well-diversified portfolio be patient over long time periods do not try to time the market invest regularly and consistently let the law of compounding work its magic

    (See for instance: investing.asp)


  • Objectives

    start retiring from full-time employment in about five years with enough savings to live comfortably for the rest of our lives

    make an average 7% compounded annual total rate of return in our investment portfolio (4.25% from asset growth and 2.75% from interest/dividends)

    before retiring from full-time employment, grow our retirement portfolio by 10% compounded per year (combined rate of return and new savings)


  • Objectives (cont’d)

    always have enough cash available to avoid having to sell securities (i.e., stocks or bonds) at a loss during a market downturn (and be prepared for a downturn to last up to five years)

    always have at least one full year's income in maturing bonds by using a five-year bond ladder (bonds are held to maturity and re-invested)

    keep enough cash, bonds and precious metal securities to ensure I don't lose sleep at night worrying about catastrophic losses in our portfolio


  • Objectives (cont’d)

    follow a routine and disciplined portfolio review process: try to continually improve portfolio quality watch for investment opportunities and compare

    them to our existing holdings if there seems to be a good investment that we don't

    already own, consider either replacing an existing holding (preferably) or adding the new one


  • Risk tolerance

    first and foremost, avoid long-term catastrophic losses of capital

    avoid portfolio value decline greater than 10% in one calendar year

    avoid too much day-to-day volatility (ideally no more than 0.5% portfolio value up or down per day) – this is a measure to help ensure not all assets are correlated


  • Risk tolerance (cont’d)

    combine growth stocks with income stocks on the expectation that: growth stocks will be more volatile (but provide higher

    total returns) income stocks will help smooth out the volatility (while

    providing growing cash flows)

    generally avoid assets with less than investment grade quality (i.e., S&P rating of BBB- or higher)


  • Risk tolerance (cont’d)

    consider small, opportunistic purchases in high risk companies (based on fundamental research and fair valuation)

    generally avoid: micro-cap (

  • Target asset allocation

    45% stocks

    30% bonds

    15% cash and bonds less than one year in duration

    10% precious metals


  • Target asset allocation (cont’d)

    distribute stock holdings over all industry sectors in proportion to our risk tolerance and growth/income objectives: 15% each in financials and technology 12.5% in industrials 10% each in materials, utilities and telecommunications 6.25% each in energy and healthcare 5% each in real estate, consumer staples and consumer



  • Asset allocation (cont’d)

    geographic allocation of stocks: 62% Canada 26% US 12% international and emerging (in $US)


  • Asset allocation (cont’d)

    growth vs. income stock allocation: 50% growth (expected total return of 8-10% per year) 50% income (expected total return of 4-6% per year)


  • Asset allocation (cont’d) keep no more than 2.5% of the total portfolio in high

    risk stocks: limited track record lesser market capitalization value strong but unproven growth prospects lower liquidity than average possibly higher than typical momentum


  • Asset allocation (cont’d) over time, be ready to add new cash, re-deploy

    maturing bonds or sell a portion of high achieving stocks to maintain the allocation among stocks/bonds/cash/precious metals


  • Re-balancing

    a properly constructed portfolio needs to be reviewed no more than once a quarter

    obsessing with and reacting to day-to-day market gyrations will not likely improve portfolio performance

    trades are to be guided by quarterly re-balancing rules and/or changes to company performance and business fundamentals


  • Re-balancing (cont’d)

    I regularly look for ways to improve portfolio quality

    in between quarterly reviews I channel my interest in investing into: staying on top of trends research analysis of company fundamentals monitoring my alerts and watch lists and now blogging…


  • Re-balancing (cont’d) consider re-balancing quarterly based on rules:

    if a single security exceeds 5% of its asset class if bonds or stocks vary 2.5% or more from 45/30 if growth or income stocks vary 2.5% or more from the

    50/50 of our equity component if US/international climbs to more than 35% of our stock

    portfolio if a single security climbs or falls more than 20% in value

    in the trailing twelve months if cash (including short maturity bonds) exceeds 15% if one sector varies more than 2.5% from its intended



  • Re-balancing (cont’d)

    consider selling any security if its fundamentals change negatively: dividend cut change in dividend payment type rating downgrade growing debt load unwanted share dilution earnings misses major management changes chronic negative sentiment among investors (including

    short attacks)


  • My 2015 year-end review

    started my review in late November

    jump-started my quarterly