Wednesday 28 May 2008

Revamping my US Stock Portfolio

After almost two years my portfolio of US shares is undergoing a face lift. I initially planned on buying a parcel of one US stock each month for the first year, picking my selections from a short list provided from the "Little Book that beats the market" website. I was then going to sell each position after 18 months and reinvest the proceeds in a new selection from the current listing. However, the stock market slump and movement in the AUDUSD exchange rate has produced woeful returns. I also managed to lose money on my AUDUSD forex trading! Rather than be tempted into day trading forex, I should have just gone long the AUD with a CFD for a similar amount as my USD portfolio. That would have hedged my currency risk (although costing a bit in CFD interest). By trying to profit from the currency trading I actually made a bad investment worse!

So, I've now decided to sell off my current US stock holdings, only retaining my 1 "B" share in Berkshire Hathaway, and a small parcel of Microsoft stock. Looking at the stocks I'm selling three have done extremely well, but five did very badly. Overall these shares are down over 10% in USD terms, and much more in AUD value:

This table doesn't have the AUD values of the stock sales yet, as the official ATO exchange rate for 27 May won't be published until June. I expect to make an overall capital loss of around $10,000 in AUD terms, so I might sell off some Australian stocks that have made capital gains and be able to offset the losses against the capital gains in this year's tax return. I can either use the proceeds of the Australia stock sales to reduce my margin loan balances (which with interest rates up around 10% aren't such a good idea) or else reinvest the proceeds on the next market dip.

I think I'll reinvest the proceeds in BRK.B stock - increasing my holding to 15 shares of Berkshire. My new theory is that Warren is probably better at picking individual stocks than I am, and he may be picking up some bargains in the current bear market (I think he was sitting on a fairly large cash position last year). I don't believe BRK.B pays any dividend, so the small Microsoft holding is needed to provide some income, and therefore make the interest on the investment loan I used to fund this account tax deductible. Investing in Berkshire seems a bit strange - I'm moving away from picking individual stocks myself these days, and investing in low-cost index funds instead (for example in my retirement account). With Buffet's incredible investment track record and advancing years it also smacks of chasing last years winner, which is a well-known *bad idea* ;)

Anyhow, I'll probably let this investment sit for the next ten years or so. Hopefully BRK.B outperforms the market, the AUD drops back against the USD over that period, and the interest rate on my investment loan drops back during the next few years so it's less than the ROI! At least by only having two stocks in this account (and only one paying a dividend) the paperwork for my tax returns will be slightly simplified. This account represents about 7% of my NW, and around 3.5% of my investment portfolio (including borrowed funds), so by itself it won't have a massive impact on my results over the next ten years.

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mOOm said...

I have 2 BRK/B shares. Nothing wrong with it, but why not diversify a bit more. Take a look at LUK for example? (I have 100 shares), LTR (ditto), country or sector funds (e.g. CHN, IFN, PBW, FF, XLF, CNY which I hold) and broad ETFs, such as SPY, MDY or levered versions, e.g. SSO. Something of an alpha+beta portfolio. I'm not saying you should buy these but take a look at some, there's no stock picking as such in terms of what I call "industrial stocks". (the rest of my US portfolio is BTF, FLIP, GOOG, HCBK, IBKR, LUV, MVC, NCT, PSPT, RICK, SAFT, SHLD, SSRX, HSGFX, and TFSMX also short QQQQ puts, but definitely don't try that!).

mOOm said...

P.S. Using a levered ETF like SSO and reduce your margin loan. The interest is much cheaper and no deductibility questions. said...

I already hold the broad US market via the international part of my retirement account investment in Vanguard High Growth Fund. This particular portfolio was meant for specific US stock picks. But I'm too lazy (and amateur) to do much research myself, so I was just picking from the pre-screened selection via the "Little Book" website listing. However, trading on this account (Comsec Pershing) is exhorbitant ($65 per trade) so I will either either "buy and hold" BRK B or simply close the account.

Since I'm going to drop the experiment with selecting "Little Book" stocks, I may just sell off the remaining stocks (MSFT and BRK B) and shut this account. I could then use a smaller portion of these borrowed funds in my CityIndex fund to by some BRK B CFDs via city index. I'll have to look closely at the annual interest cost going that route. I think it's 2% above the RBAs indicator rate, but I'll have to confirm the exact rate and compare it to my home equity backed portfolio loan (which is currently funding this portfolio).

mOOm said...

With those commissions I can understand going for one or two holdings! And also thanks for the info on the other fund you hold. Beware of the CFD route though. Because they are derivatives the ATO treats income as regular income and there is no CGT discount when you sell. At least that's my interpretation. So worth paying the higher commission if you plan to hold for the long-term. The interest rate is the RBA cash rate + 2%. I'm going to use my CFD account purely for trading and hedging as also you don't get franking credits - the provider must do very nicely on those :)