How do I properly allocate capital into the different stocks I own?

Question

Late last year (Aug. 2018), I started building a portfolio of stocks using fundamental analysis and management analysis.

The portfolio is mainly built around high-income, dividend-paying companies which I plan to invest in continuously for the next 20-30 years as long as they're growing and paying dividends.

I also plan to reinvest all of the dividends into the portfolio.

The portfolio has performed well and is currently up by 9.90% just by equity value alone since inception.

This is all well and good, but now my problem is how do I properly allocate the capital between the stocks that I own?

I currently have 10 stocks all from different industries and sectors and I'm not sure which ones I should be buying more, which ones I should be buying less of and which ones I should be looking at sell ASAP.

What I've been doing so far is buying more shares from stocks that are currently in red using my monthly deposits and dividends. It's called "averaging down" if I'm not mistaken.

I'm not so comfortable if this is the right asset allocation strategy for this. At the end of the day, all I want to achieve is minimize risk while maximizing returns for this portfolio because I am probably going to be investing millions if I stay consistent over the years and I want to do it correctly.

I'm also planning to rebalance the portfolio by the end of the year so I want to know how much in percentage I should have in each stock.

Thank you so much for the advice.

Answer 1

Congrats on the great equity gain there. Not sure if I'll be able to help much but here are some suggestions/things to think about.

(1) Why are you focused on dividend paying stocks? This seems like it would increase your capital gains taxes. See Berkshire Hathaway strategy. Consider moving your investments to ones that pay fewer dividends, or ones that only pay enough dividends to support your life if you are retired.

(2) Do you have the option to set up a dividend reinvestment plan (DRIP)? Many banks will let you set this up so that when your dividend payments come through the payout is immediately reinvested in the stock at no transaction cost. This will keep your stock purchase costs down and let you keep your rebalancing to a minimum.

(3) It seems like you're doing pretty well already so why not just apply those same principles at the end of the year when you're rebalancing? Instead of caring how much your stock went up or down over the last year try looking at it with fresh eyes and trying to decide if it still makes sense as an investment based on "fundamental analysis and management analysis".

(4) Consider buying some index funds -- while they don't have the same level of equity growth your seeing currently, statistically active managers don't beat them over the long-term. See Warren Buffet's bet with Protégé Partners.

Answer 2

I wouldn't worry about "averaging down" ("reducing cost basis"). I also wouldn't blindly invest across the board.

You should always put more money into the stocks that you think will perform better. The current price shouldn't have any influence over that at all. With 10 different stocks and if you're doing your analysis correctly, you should be able to pick which ones are better and which ones are worse. Just throw more money at the better ones.