Recently, Happily at InvestingNote highlighted that Warren Buffet’s portfolio allocation is not equal weighted but tiered. He also shared his tiered portfolio with Mapletree Industrial Trust (SGX: ME8U) taking up a whooping 30% position!
It makes me wonder if the same applied to my portfolio. While I am aware of the unequal weighting of my individual stocks, I hadn’t considered organising them into distinct tiers.
As the saying goes, “use it or lose it”. It wasn’t until I began writing this post that I remembered coming out with a tier system back in 2021!
At that time, I was exploring with US micro-caps with as many as 62 counters! Hence, it was a useful way to organise my portfolio and it also provides a gauge of my confidence in each holding.
After doing away with the micro-cap adventure by April 2022, I seldom refer to it and hence my amnesia.
As a reminder, the tiers are roughly based on absolute value:
- Platinum: At least six months of expenses
- Gold: Three to six months of expenses
- Silver: One to three months of expenses
- Unknown: Less than one month of expenses
The purpose of using expenses was to make it explicit. It was a way of sending myself a strong message.
“Hey, you’re risking six months of expenses on this counter. Are you sure?”
Let’s now take a look at the current situation.
The categorisation itself isn’t the ultimate goal. What matters most to me are these questions:
- Am I comfortable with the stocks in each tier?
- How did the portfolio change over time?
- Should I continue with this categorisation?
The short answer to the first question is yes.
Overall, the maximum position size is less than 10% of the total portfolio, which I’m comfortable with. Even if the Platinum tier stocks organically grow to a 20% position, I believe I could still sleep soundly.
It’s not surprising that Singapore Banks and REITs dominate the Platinum and Gold tiers. Given the overall allocation guideline of 60% income and 40% growth, these counters contribute significantly to the portfolio’s dividends
Venture Corporation Limited (SGX: V03) stands out as a unique income counter, not being a bank or REIT. Its impressive track record of maintaining dividends makes me confident in holding a relatively high position.
The Silver tier primarily consists of of my US growth counters. Along with Arista Networks, Inc (NASDAQ: ANET) and iFAST Corporation Limited (SGX: AIY), I will discuss them further in the next section.
Finally, for the Unknown tier, these are typically newer holdings such as NVIDIA CORP (NASDAQ: NVDA) and Lululemon Athletica (NASDAQ: LULU). Or, they might be counters that have fallen from grace but I still believe in.
Let’s move on to the next question.
How did the Portfolio Evolve?
While I can’t trace back to what it was at the beginning, I have the data on the position sizes based on cost. Reflecting on the cost-based tiers and the current state of my portfolio, here are my observations.
Small initial positions for growth counters
I deliberately limited initial positions, especially for growth counters. Although I assessed their growth potential, I couldn’t be certain of its realisation.
A smaller initial position mitigated losses from incorrect picks. For example, despite nursing from a 70% loss in Novocure Limited (NASDAQ: NVCR), the portfolio only suffered a 1% drop.
Conversely, there’s no cap on upside, as evidenced by six growth counters moving up the tiers, with Arista Networks and iFAST becoming significant portfolio holdings.
Growth fuelling the increased dividends
This was a surprising discovery.
Analysing the data, I realised that income counters, which now accounts for 63% of the portfolio, contributed 75% based on cost.
This must have meant that while rebalancing to maintain the 60% income, 40% growth ratio, I have added more to income counters using profits from growth counters.
This likely contributed to the increased dividends over the years.
Is the Tier System Useful?
While the tier system isn’t strictly necessary for managing my portfolio, it has proven to be a valuable tool. It offers a clear visual representation and serves as a reminder to periodically reassess my holdings.
For instance, I might consider consolidating my portfolio by divesting from underperforming stocks in the Unknown tier and increasing positions in more promising Silver tier stocks.
Ultimately, the most important takeaway is to let your portfolio evolves organically.
Just as evolution favours strong characteristics and discards weaker ones, portfolio management should focus on nurturing thriving investments and eliminating those that are underperforming.
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