Sell 33% of your Portfolio – a Step by Step Method

Selling stocks is a common topic discussed among investors. Sell because the company cuts its dividend. Sell because the market is about to crash (definitely my favorite reason). Sell because the stock is overvalued, etc. Those examples discuss more the timing to sell a position to eventually use the proceeds and invest again. But what happens when you need to sell stocks to finance a project? One day or another, you will have to sell stocks to finance your retirement, buy a rental property, pay for healthcare or simply buy yourself a treat. After all, you save and invest this money during decades, it’s not to all leave it to your heirs, right?

A few weeks ago, a DSR member came to me with a very interesting question.

“Mike, I have a project and I need to liquidate 33% of my portfolio in the upcoming weeks. I am so focused on a buy and hold strategy and bulk selling is so seldom, I lack experience and would like some guidance.”

In other words: How do I sell stocks, cash my money, not invest again and minimize the impact on the rest of my portfolio going forward?

While I don’t give financial advice, I built a canvas to help investors selling some of their stocks without hurting the overall portfolio performance going forward. After all, you can’t just sell the top 5 positions in alphabetical order to generate cash flow. You need a plan. Here’s how I would do it.

#1 Rank My Stock – Get rid of the weak ones

Since investing is tied to may emotions (especially when I’m about to kiss goodbye some of my positions), I think the most rational way to sell stocks would be to rank all my holdings. I could use external ranking or my own. The number doesn’t really matter either. I could simply rank my stocks from my favorite company down to the least interesting one in my portfolio. I could also rank each company individually based on an arbitrary scale of 5 or 10.

The idea is to find a way to identify you top stocks (the one you rather die and give them to your heirs before selling) and the “no so god” stocks where you are unsure if they will perform in the future or not. I’ve highlighted criterion you can use to create your own ranking here and there. Once you can separate a few weaker companies, you are already on your way to make your first sales. Think of it as a “portfolio detox” where you get rid of the fat and keep your best abs for summer!

How I would do it

Based on my experience and academic studies, I’ve developed with my team a ranking from 1 to 5 (one being a screaming sell and 5 an exceptional buy) called the DSR PRO Rating. I also did the same thing with a Dividend Safety Score going from Dividend Trash (1) to Stellar Dividend (5).

Can I trust my ranking? That is probably the most important question, right? We created our ratings for July 2018, a couple of months before the market crash. The second half of 2018 hasn’t been a fun ride for most investors. Between July 1st 2018 and June 28th 2019, both Canadian and US markets went through lots of fluctuation (enable images in email to see the graph):

Source: Ycharts / Dividend Stocks Rock results

The week prior to July 1st, DSR PRO members received their customized portfolio reports including crucial information about their holdings and the most recent PRO rating and Dividend Safety Score updates. We covered over 1,000 stocks on both Canadian and US markets. In this group, 141 companies received a PRO rating of “sell” (2) or “screaming sell” (1). How did we do?

Between July 1st 2018 and June 28^th 2019, the S&P 500 and the TSX 60 show a total return (price + dividend) of +10.50% and +4.60% respectively.

The average performance of our SELL list was -11.40% for US companies and -5.10% for Canadian ones. Our sell list outperformed the markets (negatively, that’s the point) by 21.90% and 9.70%. In other words, DSR members avoided important losses.

During the same period, 127 companies received a PRO rating of “Buy” (4) or “Exceptional Buy” (5). Results for this group of “elite” companies have been a lot better. The average performance of this group was +11.74% for US companies and +9.52% for Canadian ones. Our buy list outperformed the markets by 1.24% and 4.92%.

Minimizing your loss during difficult markets is a key element in portfolio management. You can learn more about my stock ranking here.

#2 Cash Profit – It’s time to cash on my good moves

Once I got rid of some weaker positions, I would then look at my top performers. Why? Because they are likely overweight in my portfolio. Lower ranked stocks are likely to have underperformed in the past couple of years. If I get rid of them, my top picks would weight even more in my portfolio. This is time to trim it a bit and rebalance my exposures. After all, the whole purpose of investing is making money. If you make money on paper, you might as well cash it!

To illustrate my example, I will use my pension plan account. I report my dividend income monthly (here’s the June 2019 update). Among my Canadian stocks, I could trim about 2K to 2.5K away from Alimentation Couche-Tard (ATD.B.TO), Enbridge (ENB.TO) and CAE (CAE.TO):

Looking at my US portion, I would sell about 1K-1.5K of each Apple (AAPL), BlackRock (BLK) and Disney (DIS) on top of selling 2 to 3K of Microsoft (MSFT), Starbucks (SBUX) and Visa (V).

Interesting enough, these transactions would generate about $6.7K CAD and $13K USD for a total of ~$23.6K CAD (using a conversion rate at 1.30). According to my June report, my portfolio total value was around $147.3K CAD. Simply by cashing some extra profit, I would liberate about 16% of my portfolio.

If I had used my raking from step 1, I would have likely sold Lassonde (LAS.A.TO) and Intertape Polymer (ITP.TO) as they show ranking of 3 (hold) for another 9.6K. This would bring the total in cash up to 22.5% of my portfolio. It would have been a little bit more difficult to sell US positions as they are all rated as 4 or 5 according to my ratings.

#3 Review Sector Allocation – Reduce my exposure

Following this methodology, I would need to find an extra ~$15K to meet my goal of 33% in cash. After selling weak positions and cashing part of the profit on my best ones, the last thing I must look at is my sector allocation. I don’t want to be over exposed to a sector going forward as I would jeopardize the rest of my portfolio. This is what my sector allocation looks like (before all trades):

I would likely have to sell a part of my financial services and consumer cyclical stocks. I would obviously redo my sector allocation considering I sold a few positions already. Then, I would make sure to keep all my sectors to a maximum of ~20% of my portfolio. In this real example, I would likely have to make a choice between Royal Bank (RY.TO) and National Bank (NA.TO) and between BlackRock (BLK) and Lazard (LAZ) since they are similar companies evolving in similar industries.

I could also sell a part of each and keep all 4 in my portfolio with smaller number of shares. In both cases, this would do the trick (but it would increase my transaction fees).

Final thoughts

This is a quick canvas that should help you determine which stocks you should sell first. Selling a third of your portfolio within a few weeks would not be an easy task. Maybe a better planning for liquidity would avoid such situation. I would rather sell about 10-15% of my portfolio at a time instead of going “all-in” with such massive sell-off.

Among other factors to consider, the tax impact is the most important and most personal of all. Before pulling the trigger, a call to your account is advised. Then, the timing of selling would also have an impact. It’s a lot “easier” to sell in mid 2019 when the market has fully recovered (and more) then at the end of 2018 where it was at its lowest point of the year. If you are like me and have money invested in more than once currency, this will add-up to the headache. I would likely try to keep a 50-50 balance between my CAD and USD portfolio.

I guess the best way to proceed with such a massive sell of my portfolio is to have a canvas like this one. With a clear plan in mind, it will help me avoid making emotional mistakes.

What about you, what would you do if you had to sell 33% of your portfolio?

 

 

disclaimer: long all the above.

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