Sold Some Stock and Buying Fixed Income To Meet My Target Asset Allocation

Last week I completed a transaction in my account – one I have wanted to do for awhile now but never did because of no clear plans of what to do with the cash. The stock was Flextronics and was a lone individual holding that was obtained as a result of some Solectron shares I held. Flextronics purchased Solectron and therefore I was left holding the FLEX shares. I was familiar with Solectron and it fit within the small-cap portion of my portfolio. Flextronics does not fit this small-cap profile and frankly I am not interested in the stock. It does not pay a dividend and I strongly believe the assets that were tied up in the stock would be better served elsewhere.

Although I have not entered the trade yet, I will also be selling shares I hold in my employee stock purchase plan. I have done this trade the last couple of years and deposited the cash in my RRSP account. There are two reasons for this trade. The first is that I already hold a number of stock options with the company and would like to limit my holdings of the company – it is not a good idea to have any one holding make up too high of a percentage of ones account for diversification and risk management issues. I am very confident in the future prospects of my company but need to adhere to the portfolio principles (see #10) I have set out. The second is that I am heavy on my Canadian asset allocation and need to divert this money to other assets in order to manage my portfolio risk. I manage risk by adhering to a target asset allocation.

So what am I going to do with this cash? The largest need in my asset allocation is in the fixed income arena:

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My plan for this money is to purchase a short-term bond ETF and a real return bond fund, namely the iShares CDN Short Bond Index Fund (XSB) and iShares CDN Real Return Bond Index Fund (XRB). These will provide additional bond diversification to the bond fund I currently hold in my pension plan and going short adheres to William Bernstein’s advice in his books to stick with short bonds, as the extra yield on longer term issues does not provide an adequate risk/reward tradeoff. Both these transactions will occur in my CSA account.

(Photo Credit: Steve Woods)

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