A deeper look into my portfolio

We take a deeper look at my investment portfolio in this post. A majority of my investments are in stocks or stock index funds. I have been working on my investments for last 20 plus years. These investments have evolved over time – initially all I had were some stock and bond funds – then I started investing in individual companies about 12 years ago. The shift from index funds to individual stocks was gradual and still on-going. Today, I have about an even split between them.

Before reading any further, please go back and re-read my first post on this topic. It gives an overview of my entire investment portfolio. Here I dive deeper into each major investment type in it.

Index Funds:

As I chronicled in My 401(K) Story, I have been investing in mutual funds since 1992. Most of these investments are in my tax-deferred accounts – 401(K) and IRAs. I prefer low-cost index funds over actively managed mutual funds wherever possible. About half of my investments are in employer-sponsored 401(K) plans where there is a limited selection of funds available. Fidelity and Vanguard index funds are among the lowest-cost funds available anywhere. I pay less than 0.1% expense ratio on nearly all of these funds. Wherever available, I pick premium class shares where the expense ratios are even lower but minimum investment amounts are higher. For instance, I have Fidelity Total Market Index Fund (FSTVX) – Premium Class shares whose expense ratio is 0.035% and minimum investment amount is $10,000.

The reason why I appear to have too many funds of similar style in my portfolio is that they are spread over multiple accounts and managed by different brokerage firms.

Individual Stocks:

During 1995-2000 stock market boom, I had dabbled into individual stocks but with small amounts of play money. I wasn’t as good an investor back then as I am now. As with the majority of novice investors of that era, most of my individual stock positions ended up in losses. There are only four survivors from that era that I still own: Amazon, Intel, Cisco, and Texas Instruments. Two of them – Amazon and Intel – are still among my top stock positions as you can see from the table. I have added to these two positions several times since then. The other two stocks – Cisco and Texas Instruments – are not big positions relative to others.

In 2005, I started researching individual businesses and investing in stocks whenever I could find a good candidate. I would move money out of index funds to buy shares in these companies. I did not have a target allocation nor an end date for this process. I would cash out from an index fund when I need money to buy company shares. This investing process still continues – since then I have about half of my stock positions in individual securities.

The table shows my top 80% positions in individual stocks. These are my core holdings. Seldom do I sell any of these securities. On occasions, I add to the existing stakes whenever I find that stock selling at a reasonable price. A lot of these positions were initiated in 2008-2012 period when stocks were at a decade low

The other 20% are smaller positions or positions that I am in the process of either building or winding down. These positions have higher churn since I am not yet sure if they are worth keeping for long.

I attempt to buy what I consider durable well-run franchises. If the valuation of a business is high then I just buy an initial stake. Over time as prices change, I keep adding to my stake. I don’t sell because a stock has had a good run. I only sell my mistakes – where I misjudged a business’s durability – its competitive position or its management quality, etc.

Stock Options:

On a relatively small part of my portfolio, I write stock options. I do this primarily to generate income at the expense of total return. This still has the same risk profile as owning stocks – except in this case I trade off future capital gains for near-term income. I identify stocks that are good reliable franchises but not expected to have any near-term catalysts – and then I write covered calls or cash-covered puts on them to generate income. Often times, these are stocks that also pay dividend. My income usually consists of some combination of dividend, short-term capital gain, and option time value.

There are four different option strategies I use:

• Covered Calls
• Cash-Covered Puts
• Synthetic Calls
• Protective Collars

The distribution of funds between these strategies changes over time. In lower volatility markets (like today’s), I find more dividend paying stocks for Covered Calls. Other times, I identify more opportunities for selling time-value via Puts. Look for a future post on how I generate income from options.

If you are not looking for short-term income, this is not for you. If you have other sources for income and have time to grow your savings, your best bet is still old-fashioned patient stock investing. Also, it only makes sense for experienced investors who hold individual stocks and have margin accounts.

To wrap up, I want to briefly address two questions that may arise in readers’ minds:

• Why do I invest in individual stocks instead of just staying with broad market index funds (or ETFs)?

For most investors who have better things to do than spend time researching public companies, investing their savings in diversified index funds is the best route – hands down! Even I spent most of my investing life steadily buying and holding index funds – see my 401K story.

I buy individual stocks mainly because I have a deep interest in learning about business models and finance. The jury is still out on whether I can beat a broad market index with my stock picking skills. I make no claim of superior insight – still I enjoy spending time researching businesses and making educated bets on their future.

• Why do I use stock options? Isn’t this day-trading?

I don’t do day-trading. I don’t spend time glued to a computer screen every day looking at stock charts and placing trades on daily basis. I write options on stocks that I am very familiar with. These options are mostly of 3-month to 12-month durations. There is usually only one day every month (every third Friday) when I log into my brokerage account and buy back, write, or roll over expiring options. That’s not a lot of time investment. For identifying good candidates for option writing, I rely on the same research that I do for investing in individual stocks. In fact, nearly all of my option positions have the same underlying stocks that I already own in my stock portfolio.

A final note: I don’t necessarily endorse buying these stocks or funds at today’s prices. My positions were built gradually over a period of time.