“I am fully invested according to my target allocations (which are stable) at all times. I reconsider the allocations annually, perhaps changing by 1% or 2%, but the ultimate target has not changed for a while – a retirement portfolio with 80% equities (including eventually 10% Utilities and 10% Real estate) and 20% Fixed Income/Cash. Maintaining those percentages requires trimming when the market is rising and buying when the market is falling. I do both without a second thought, though trimming can be agonizing, since there are often times when there is nothing I want to sell. Buying is easy.
The equity portion will produce enough to supplement Social Security to meet our full income needs. The fixed income portion will be enough to bridge for five years between retirement at 65 and delayed Social Security at 70. We might ultimately choose a different plan, but the amounts are sufficient to fund this plan.
The turnover in my retirement accounts, where the bulk of the trading occurs, is fairly high. My wife’s accounts and our taxable account are traded much less frequently. The total sales over the past 12 months amount to roughly 30% of my IRA balance, though in many cases the moves are circular. (E.g. add to AAPL on a dip, trim from AAPL on a rebound.) These trades allow me cash to enter new positions in size. Over the last 12 months the dividends in those accounts are roughly ~3% of the balance and new contributions are less than 1%. Without trimming/selling, I would have to save all new money for an entire year to add a position such as HD or ITW. My recent add to CSCO would have been half a year of new money. There are always more good companies to buy than there is money available. But you won’t find me complaining that I wish I had more of something! If I wanted more, I would make it happen.
I am a total return investor, not specifically an income investor, however the general trend of the trading serves to steadily increase the dividend income over time. Our dividend income more than doubled from 2013 to 2018, proving the power of compound returns over time!”
[…]
“it is quite simple, I don’t overthink it. Over the last few weeks, the market movements boosted the “core equity” portion to a $15k excess while pushing the utility and REIT allocations down to a $3k deficit apiece. (Or something like that, I forget the exact numbers.) I procrastinated, because there is no need to hurry a trim in a rising market, but pulled the trigger yesterday on a few moves to bring those numbers back into balance.
Trimming like that is driven by market moves, so while I’m selling into a hot market, I’m not necessarily selling my strongest holdings. Yesterday, for example, I trimmed CVS and INTC. Both are solid enough companies, but I doubt anybody would pick them out of my portfolio for their earnings growth or strength.
Trimming to maintain position size may lean towards selling strength, but the flip side is that it opens space in the allocation to purchase more shares on a dip. For example, the total sales of AAPL since 11/1/2017 amount to 65% of the position on that date, but the total purchases amount to 55% of that position. Our net position has decreased by only 10% – and would have increased by 10% if I were comfortable holding a position that large.
In contrast, we hold exactly the same shares of JNJ today that we did then. Because that position is held in my wife’s account, and in our taxable account, it gets traded rarely/never. No trades there in almost four years.
One way to assess whether we are selling strength and buying weakness is to judge how the portfolio has evolved over time. The two lists are the differences between our portfolio on 1/1/18 and our portfolio today. Eight eliminations and eight additions. Which list of stocks is stronger?
BDX, GE, GIS, GPC, IBM, MKC, RHHBY, SBUX
vs.
BRK, HD, HRL, ITW, INTC, MRK, PEP, PFE”
[…]
“My approach keeps a stable portfolio profile and balance, which I could never achieve without trading. I value that stability, and understand how the portfolio is likely to respond in different market conditions. I am comfortable with that.
Other people get caught up in making the right moves, guessing which companies will deliver stronger returns. I am largely focused on maintaining the portfolio metrics, and comfortable letting the returns take care of themselves.”