Unconventional wisdom: My portfolio, warts and all
A self-review shows that successful investing isn’t about perfection - it’s about discipline, patience and living with imperfection.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: My portfolio, warts and all
“It’s on the strength of observation and reflection that one finds a way. So we must dig and delve unceasingly.”
- Claude Monet
Over the years several members of the Morningstar community asked me to offer guidance on their portfolio. The trust people put in my opinion means a good deal and I try to help where I can within the confines of the general advice license Morningstar holds.
I thought it would be helpful to go through this process with my own portfolio.
One of the challenging parts of investing is much of the advice comes from academia and professional investors who have different constraints and goals than many individuals. You can learn from both groups but trying to replicate their approach is often difficult and can be counterproductive.
There is also an over emphasis from engaged individual investors on creating the ‘perfect’ portfolio with the ‘perfect’ investments. This encourages overtrding which often undermines investors. It can also create a feeling of inadequacy even if much of the commentary around investing is a form of financial virtue signaling that doesn’t reflect the real world.
Managing your own portfolio involves several constraints which makes it unwise to try to live up to the myth of an ‘ideal’ portfolio. An example that impacts everyone is the often-significant tax consequences from selling which is a real and consequential factor in evaluating which of two investment options is ‘best’.
There are also countless circumstances specific to each individual investor that influence portfolio construction. It is naive to assume a sterilized theory created in a vacuum can hold up in the oft-messy reality.
My portfolio – warts and all
Below are the current shares and ETFs that I own and the weight of each position. This does not include any cash I have or my super (~10% of total investments) which is invested roughly 50 / 50 in a global and Australian ETF.
For context my high-level investment goal is to build a stream of passive income that grows at a rate that meaningfully exceeds inflation. My strategy is to invest in non-cyclical companies at attractive valuations with sustainable competitive advantages, low business risk, strong finances and sustainable and growing dividends.
Time for the self-flagellation. I’ve cast a broad net in my self-critiques and grouped them into two categories – portfolio construction and holding specific.
Portfolio construction critiques
Some holdings exceed my self-imposed position limits
The first thing that jumps out is I have six holdings that exceed my self-prescribed 5% limit for holdings in any single share. Why 5%? It is an imprecise figure, but it represents the permanent loss of capital that I think I could bounce back from and still achieve my goals.
Permanent loss of capital shouldn’t be confused with volatility. I am comfortable with my portfolio fluctuating but companies can go bankrupt and wipe out investors. As you age the opportunities to make up for a permanent loss of capital decrease.
I try to buy companies that are unlikely to suffer a permanent loss. And each of the holdings that exceeed my limit are representative of this approach – ADP, Cisco, IBM, Philip Morris, Johnson & Johnson, and Cummins. These are all prominent and profitable companies.
I’ve written about my own dilemmas with ADP and Cisco previously and I plan to trim my Cisco position soon. Nevertheless, even seemingly strong companies do occasionally run into issues like the banks during the global financial crisis. Companies like Worldcom and Enron seemed to be doing well before they were undone by fraud which was only apparent to most investors retrospectively.
The size of these positions is reflective of their tenure in my portfolio. ADP was first purchased in 1981, IBM in 1995, Philip Morris in 2002, Cisco and Johnson & Johnson in 2009, and Cummins in 2015.
I’m comfortable with the prospects for these companies within my investment strategy and try to trim only when I feel it is absolutely necessary given the tax consequences.
I have too many holdings
A portfolio with 37 holdings violates my view that there are significant benefits to simplicity. The main benefit of simplicity is it discourages tinkering and makes it easier to stay on top of individual positions.
The more holdings in a portfolio the more likely an investor will make changes which is often an act of self-sabotage.
My justification – or excuse – is that I have a long history of not altering my portfolio. It isn’t in my disposition to chase returns and if I’m guilty of anything it is an over reluctance to sell anything.
My job and interest in investing also make it easier for me to stay on top of individual holdings. When you combine that with avoiding capital gains tax you end up with 37 positions.
This isn’t ideal but when you combine it with my position size limits it isn’t surprising I’ve ended up in this position.
I have too many small positions
I have 10 holdings that make up less than 1% of my portfolio. Every portfolio has core and auxiliary positions. Yet a position at less than 1% isn’t going to move the needle even if the share skyrockets.
Six of those positions are in Australian shares which reflects the newish role they are playing in my portfolio and the outperformance of the US market. One share is a recent position in Brown Foreman which I think is cheap and will continue buying.
I don’t have an excuse for Proctor & Gamble, Constellation and Bristol Meyers. In these cases, while I was building the positions the shares started to rise and I stopped buying as the valuation became less compelling.
There is a case to be made to sell these relatively small holdings yet in some cases that means triggering capital gains. I’m going to hold on to them as long as they still meet my other criteria for passive income growth.
My asset allocation is heavily weighted to the US
My portfolio is shaped by who I am and my life’s journey. I’m overweight the US as I spent my early career and many of my core holdings were purchased when I lived in the US. My portfolio would look very different if I spent my whole life in Australia.
Yet there is also a misconception that owning companies based in different countries provides diversification benefits. Is a company based in the US that earns most of its earnings outside of the US any different than a company based outside the US? Not really.
This is not a major concern as I will increase my Australian exposure over time with my super.
Individual position critiques
Some of the shares I hold are expensive
I focus on valuation when I purchase an investment but I know over time valuation levels will ebb and flow. I’m comfortable with that. I’m investing for the long-term and have an income focus so I’m content to ride the inevitable variations in valuation.
A reasonable counterargument can be made for a rotational approach where cheap shares are purchased and then sold when they become more expensive to free up cash to buy whatever is cheap at the time.
This approach is reliant on the precision of valuations. I’m skeptical that most investors can consistently succeed with this strategy. This is a case where an investment strategy sounds good but is very difficult to execute.
This is also where the differences come out between professional and individual investors. Professional investors need to continually beat – or at least approximate – index returns and the performance of their peers. If they fall short for even a short amount of time they will suffer withdrawals. Since professionals typically report pre-tax returns the tax consequences of portfolio rotations are of minimal concern.
As a long-term investor I’m not overly concerned if I underperform for periods of time. As an income investor I’m more focused with the growth of passive income than relative performance. This is why it is critical to understand what you are trying to achieve and ensure your investment strategy is aligned.
Many of my holdings don’t look like they belong in an income portfolio
Apple’s dividend yield is currently 0.34% while Microsoft yields 0.86%. These are not shares found in the typical income portfolio. But the current yield doesn’t tell the whole story.
I bought Apple in early 2016 when the dividend yield was approximately 2.30% at a split adjusted price of just over $24. Since that time the dividend has grown at an annual rate of 6.60%. The shares are also up over 1000%.
Microsoft is much the same story. I bought the shares in 2012 when the yield was over 3%. The dividend has gone up at an annual rate of 17% over those 14 years and the shares are up by over 1300%. I’m content with both decisions and wish I had bought more.
This is also a case where the specifics of what each investor is trying to achieve matters. My goal is not to generate the most income possible right now. If I was maybe I would consider selling and buying shares with higher yields – although those capital gains taxes would be a bitter pill to swallow.
My goal is to grow my passive income at a pace meaningfully higher than inflation. Microsoft and Apple have more than achieved that goal and I think they will continue to raise their dividends.
Boeing is the hardest position to justify. Boeing suspended their dividend in 2020 in response to the pandemic. This was understandable as it is hard to sell planes when nobody can fly.
At the time I expected the dividend to be reinstated but Boeing ran into problems with their 737 Max production after several planes crashed. Both events caused Boeing to take on debt and their balance sheet is a mess. The company has a big hole to crawl out from.
Each year when I do my portfolio review I come up with some excuse not to sell. I need to just pull the trigger. I wouldn’t buy a share that didn’t pay a dividend and I shouldn’t hold one.
How reviewing my portfolio helps me as an investor
Each time I do a portfolio review one thing strikes me – the value of time. Having a long-term perspective is one of those generic pieces of investment advice that everybody gives and few follow.
In the next chart I’ve put in the year I first acquired each position. As I reflect on each of these purchase dates I think of all the things that have happened in the world and my own life since that time.
It reinforces how choices made decades ago are positively impacting my life now. It shows that many of the things investors worry about matter little over the long term.
Being a long-term investor is hard. It is easy to second guess yourself and there are always compelling pitches for various opportunities. Reviewing my portfolio helps me ignore the noise.
Final thoughts
I had some misgivings about sharing my portfolio and I’ve been reflecting on why I feel that way. I think it is because the names on the list represent the choices I’ve made – and the ones I haven’t.
Survivorship bias obscures some of the big mistakes I’ve made. My largest position going into the global financial crisis was Citigroup and the bank Washington Mutual was a core holding. I lost almost my entire investment in each.
I had a large position in Intel which I sold at a loss in 2024 after the dividend was eliminated. This year Intel is up over 220%.
I bought Spanish mobile phone provider Telefonica in 2012 when I was also buying Microsoft. I lost 80% on Telefonica and should have put the cash into Microsoft.
CSL is my smallest position and got there the old-fashioned way – by plunging in price.
Sharing and vulnerability go hand in hand. That is why it is easier to talk about your winners and ignore any investments that haven’t worked out.
The cumulative effect of our reluctance to talk about investing means many investors are only exposed to idealized versions of a portfolio.
The point of sharing my portfolio is not to suggest anyone should copy anything I’ve done. It is to show the messy reality of life and how factors you won’t find in a finance textbook can influence decision making.
I hope this exercise adds a dose of reality to the constant stream of utopian investing commentary. Share your thoughts at mark.lamonica1@morningstar.com
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What I’ve been eating
Every national dish needs a good origin story even if it is made up. The classic story about the Spanish Tortilla involves a poor housewife in Navarra who had to feed Spanish military officers during a civil war in the 1830s. She only had eggs, onions and potatoes.
In reality the origins of the dish likely date back to the early 1600s and was a biproduct of the hot new import from the Spanish colonies – the humble potato. Whoever invented the tortilla deserves praise.
Tortilla de patatas with aioli is the version from an underground restaurant called Letra House off Kent Street in Sydney. Letra House is the follow-up restaurant after Bar La Salut in Redfern closed after a contract dispute. Bar La Salut was one of my favourite restaurants, but Letra House held its own. Hard to go wrong with a meal of croquettes, jamon Iberica and a tortilla.
