TRADE ALERT: risk-management in action
I reduced positions in 4 stocks today, the latest example of how not-greedy I am
I reduced 4 stock positions today, for the usual reasons I do that in the YARP portfolio. The details are in the shared research deck, and these moves reduce the equity exposure in this portfolio by 10%, as itemized below.
Excluding the stock names for the privacy of our paid subscribers, here’s what I did:
Reduced 1 stock from 5% of portfolio to 3%
Reduced 1 stock from 5% of portfolio to 2%
Reduced 1 stock from 5% of portfolio to 1%
Reduced 1 stock from 2% of portfolio to 1%
And what are those “usual reasons” I sell a stock?
I just qualified for a dividend, am ahead on the stock since purchase, and its price shows strong signs of rolling over. That last part characterizes most of the market right now. And Salesforce (CRM) earnings tonight, which dipped the stock by 15% in after-hours trading, would take about 250 more points off the Dow Industrials tomorrow AM if that after market plunge holds.
There are other stocks that look more attractive from my 40-stock basket. That is not the case with these, but “upgrading” is always front of mind for me.
The broad market is turning against dividend stocks, and sometimes no stock is worthy of being more than 1-2% of the portfolio. That’s pretty much where we are, after a strong run up in some utilities and REITs, which I cashed in some unusually high percentage profits on in recent weeks. By “cashed in” I don’t mean selling out completely. Remember, I own 40 stocks and each one has at least a 1% portfolio weighting.
Note that even if the entire stock market looked historically dangerous to me, I’d still insist on owning 1% in each of the 40 stocks, so I’d have 40% of the YARP portfolio in dividend stocks. And if the stock market crashed over the next month, I expect to make money. What?
Because of that put option position, which as noted recently, I refreshed to be more sensitive to market movements. It had a banner day today, but that’s just one day, and is expected on what was a sharp down day for many stocks. But the key to the put options is that I structure them as follows:
Don’t spend much capital, and be willing to lose what I put up if the market doesn’t fall much. The puts make up well under 1% of assets currently.
Own puts that are far enough “out of the money” so that if a strong decline does ensue, the value of those puts will go parabolic.
That has created situations for me in the past, many times, where the headlines are screaming and investors are freaking out, but I’m just watching my portfolio value stabilize or increase. The Core portfolio has this same feature, just not with as much precision as a 40-stock portfolio hedged with options can provide.
The market is worried about rising long-term rates and I think it should be. Those puts have the potential to single-handedly offset losses in much of the YARP stock portfolio if this decline goes from another blip to something serious.
This is why I don’t start to think about “playing defense” after markets start to roll over. I always play defense, just in different forms based on what makes sense at the time. It sure beats trying to “wave the flag” for a bull market all the time.