Filling portfolios with cash

Buying stocks while sharemarkets are plunging is hard. Not buying stocks when the market is rising is just as difficult. In both cases, value rather than price should be your anchor.

In August 2011 when markets tumbled, we purchased a number of well-priced stocks for our model portfolios (see Portfolios pounce on bargain prices). Now, with the All Ordinaries Accumulation Index having risen 8% since 31 Dec 11, and many of the stocks in the portfolios themselves up far more, a new stance is required.

Value has become more scarce, a fact made clear by the current 21 stocks on our Buy list—last August it was over 30. Now is not the time to be piling every spare dollar into shares; it's about investing prudently and making sure that our portfolios are built to withstand any weather. For our model portfolios, this has meant an increase in our cash reserves.

The model portfolios continue to perform admirably, with the Growth portfolio rising 8% and the Income portfolio returning 5% (including dividends) since 31 Dec 11. Buys and sells in this period have been minimal.

Income portfolio

Whilst we considered adding a number of stocks over the past few months, none proved cheap enough. Instead, we’ve topped up our holding in WHK Group buying 4,000 shares at $0.84 taking the portfolio position to 4%. We’ve also taken advantage of Treasury Wine Estate’s recent share price rise, selling the portfolio’s small position inherited from its investment in Foster’s, netting $1,733.

With the cash balance rising from $12,278 at 31 Dec 11 to $26,303 today (now 15% of the portfolio), the future dividend stream will be reduced. But it’s preferable to forego short-term income now to ensure stocks can be bought at sufficiently cheap prices.

Members that have followed our advice (see The case for cash) and increased their cash reserves should feel comfortable that when value emerges, we’ll be well placed to act.

Growth portfolio

A similar approach has led to very few changes to the Growth portfolio.

ARB Corp has been a tremendous performer, rising over 200% since our original purchase in 2005, and it has paid over $4,400 in dividends. However, it’s now the portfolio’s largest holding and also sports a share price over $9. With the sale of 700 shares at $9.315, that delivers $6,521 in cash for future investments and restricts the overall holding to 5%.

Infigen Energy is a company we’ve long considered suitable for the Growth portfolio and with the share price back under 25 cents, we’re opening our account with a 2% position.

Despite the recent write-offs (look out for an update later today) grocery wholesaler Metcash remains reasonably cheap and we’re doubling our position to 4% with the purchase of 1,100 shares for 4.145 each.

The Growth portfolio has a healthy cash balance of $16,548, which will rise further as more dividends are banked over the coming months. As with the Income portfolio, this hampers short term performance but leaves it well placed to pounce on bargains.

Successful portfolio management requires patience. The portfolio you own today may not be the one to deliver satisfactory returns tomorrow, which is why regular reviews and subsequent sales and additions, such as those described above, are a necessity.

Rising share prices tend to breed confidence, which is most often the undoing of the unprepared investor. So do yourself a favour: Pull out your portfolio, check the stocks within it, their prices and values, and their respective portfolio weightings. Then make any necessary changes while the going’s good. You won’t get the same opportunity when pessimism returns.

Note: For the most recent detailed portfolio review see Growth portfolio ready to pounce and Income portfolio’s first class seal.

We’ve applied for our maximum allotted shares via the QBE Insurance share purchase plan and we’ll update the impact on both portfolios once allotment details are announced.