Portfolio Tier System
A number of months ago I mentioned that I was working on developing a tier system for my portfolio. The idea behind the tier system is to ensure focus on adding to my highest conviction stocks especially during times of volatility. When the market sells off it can be quite easy to get distracted. I would like to give a hat tip to European Dividend Growth Investor who inspired me with the original idea.
Number of Positions
I currently have 24 individual positions in my portfolio. Whilst I do not have a hard or fast rule when it comes to the number of positions, I have concluded that this is very close to the upper limit of individual stocks that I would like to hold. I do not invest in positions on a whim and like to be fully up-to-date on how my positions are performing which takes time each week. Added to this, I work a full-time job so I am trying to balance my investing activities outside of this. If I were to increase the number of positions any further I would be spreading my time too thin or neglecting some positions. If you are not already aware, I invest in a combination of growth and value stocks with a desired 70/30 split on a cost basis.
I have divided my portfolio into 4 tiers with 6 stocks in each tier. Tier 1 represents my highest conviction stocks and as such should represent the highest weighting in my portfolio. Conversely, Tier 4 represents my lowest conviction stocks and as a result should represent the lowest weighting in my portfolio. The target tier structure is as follows:
Tier 1: 40%
Tier 2: 30%
Tier 3: 20%
Tier 4: 10%
The above table is sorted in alphabetical order within each tier. The ordering does not necessarily reflect the rank within each tier.
Allocating positions to each criteria is based on conviction. You can’t borrow conviction from anybody else. A stock I might classify as tier 1 might be classified as tier 3 by someone else and vice versa. I build my conviction through in depth due diligence and analysis. Check out the Due Diligence Checklist for more on what this entails. Before implementing a tier system in your portfolio it is recommended to have a clear investing strategy.
The tier system also reflects the perceived level of risk. You will see that the stocks in Tier 4 could generally be described as higher risk owing to the fact that they are less established and have smaller market caps. By the same token, Facebook and Microsoft, which are two of the largest companies in the world, are in Tier 1.
As you can see from the above I am slightly off my target allocation at the moment:
Tier 1: 39%
Tier 2: 26%
Tier 3: 21%
Tier 4: 14%
Shopify is underweight as a Tier 1 position at the moment and likewise Johnson & Johnson is underweight as a Tier 2 position. Airbnb is also underweight as a Tier 3 position but this is due to the fact that it is a very new position in my portfolio.
Tiers are not set in stone and are reviewed periodically. For example, if I add a new position to my portfolio I will never allocate it to tier 1 or 2 straight away. The stock has to earn this right over time. The 2 positions I added most recently are Airbnb and Enthusiast Gaming Holdings which you will see are in tier 3 and 4 respectively.
I found that performing this exercise to be a very worthwhile one. It has helped to add some clarity to my portfolio. I dollar cost average each month so the tier system gives me a steer as to where I should be allocating my capital without getting too bogged down on short term price movements. Additionally, if there is a market crash I will know exactly which stocks that I should be loading up on.
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.