Portfolio Update: Trimming Overweight Positions

Each position in your portfolio has a target weight, or ideal position size based on initial purchase. Around a position’s target weight we also assign a minimum and maximum tolerance band. Since positions are in constant fluctuation, the tolerance bands allow us to minimize trading costs during typical re-balancing, and focus on areas that have increased (or decreased) to levels where executing a trade is prudent and gives us the best odds of either reducing risk or increasing potential returns.

We recently placed trades in select client accounts to trim overweight positions that had appreciated above their maximum tolerance band.

Not all accounts had applicable trades. Sales at the individual account level varied, since clients generally have different inception dates in the strategy and therefore different holding periods/position weights. In taxable accounts, we did our best to balance sales against the prudent realization of capital gains.

The most common positions trimmed were:

  • JP Morgan (JPM)
  • Norfolk Southern (NSC)
  • Microsoft (MSFT)
  • Johnson & Johnson (JNJ)
  • Philip Morris (PM)
  • General Electric (GE)

It is important to iterate that we are not making a market call.

Much has been made recently in the financial press about the anniversary of the bull market that started in March 2009, and the more recent “Trump Rally”. Making market calls (to buy or sell) simply because the market has gone up or down over an extended period of time is not a profitable strategy.

However, one of our firm’s core principles is that the price you pay determines your return. The lower the price paid, the higher your potential return all else being equal. With markets now trading at significantly higher valuations, it is a fair assumption to expect lower future returns relative to the last 8 years. This doesn’t mean lower market returns will manifest this year or next, but that the odds of lower returns in the future are now higher.

Another of our core principles is that the future is unknowable. We simply don’t know if the “Trump Bump” will continue or if the “Trump Dump” is right around the corner. No one does! To trade around the unknowable future, we use trading rules and systems. Trimming overweight positions that are above their maximum tolerance bands is one of those rules.

If a correction does happen, we will have fresh capital to add to existing positions or to buy new positions.

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