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Are You Diversified? Reader Portfolio #2

Investment ReviewIn this reader portfolio review, I have a larger portfolio to assess than the previous one and I am adding another aspect to the diversification review as I thought it was pertinent for this portfolio. I will also be looking at the market capitalization diversification.

As previously mentioned,  I engaged my readers through my newsletter (those are the benefits of subscribing :)) and got an amazing response for this diversification review project. My goal was not to do an extensive review of portfolios but rather doing a surface level sector diversification review and see what readers have to say as well. The entire process is anonymous.

Diversification by Sector

I believe that sector allocation in your portfolio is very important as it represent how money is spent by consumers and companies. The sector classification can actually be complicated with multiple levels of classification and I prefer to keep it simple. As such I look at classifying stocks in the following sectors.

  • Bonds
  • Consumer Discretionary
  • Energy
  • Entertainment
  • Financials
  • Healthcare
  • Real Estate
  • Resources
  • Technology
  • Telecommunication
  • Transportation
  • Utilities

I have added a couple of sectors with Bonds and Resources. Bonds aren’t stock but they have a purpose. It’s also important to note that a diversified portfolio doesn’t need to be equally spread across all sectors but rather to avoid being overexposed by sectors (some sectors are more risky than others too)

Portfolio Review

Below is the 31 stocks in this reader’s portfolio. Take a few minutes to look at the stocks. They are all Canadians and I have to admit that some stocks were not obvious to look up as they trade on the CVE.  Let us know what you conclude.

CompanyStockSectorMarket CapClassification
Altagas LtdALA.TOUtilities4.45Medium Cap
Ainsworth Lumber Co.ANSResources0.85Small Cap
Algonquin Power & UtilitiesAQN.TOUtilities1.48Medium Cap
Avigilon Corp.AVO.TOTechnology0.67Small Cap
Amaya Gaming Group Inc.AYATechnology0.53Small Cap
Bell CanadaBCE.TOTelecommunication39.91Large Cap
The Bank of Nova ScotiaBNS.TOFinancials78.37Large Cap
Boston Pizza Royalties Income FundBPF.UNConsumer Discretionary0.34Small Cap
Corby Distilleries Ltd.CDL.AConsumer Discretionary0.59Small Cap
Calian Technologies Ltd.CTY.TOTechnology0.14Small Cap
Contrans Group IncCSS.TOTransportation0.37Small Cap
Directcash Payments IncDCI.TOTechnology0.39Small Cap
Enghouse Systems LimitedESL.TOTechnology0.66Small Cap
Gibson Energy Inc.GEI.TOEnergy3.06Medium Cap
GENIVAR IncGNV.TOFinancials1.28Medium Cap
Loyalist Group LimitedLOYFinancials0.08Small Cap
New Flyer Industries Inc.NFIConsumer Discretionary0.614Small Cap
North West CompanyNWC.TOConsumer Discretionary1.12Medium Cap
Pembina Pipeline CorpPPL.TOEnergy10.36Large Cap
Toronto-Dominion BankTD.TOFinancials78.44Large Cap
Crescent Point Energy CorpCPG.TOEnergy14.41Large Cap
Davis + Henderson CorpDH.TOTechnology1.41Medium Cap
Inter Pipeline FundIPL.UNEnergy6.53Medium Cap
Pizza Pizza Royalty CorpPZA.TOConsumer Discretionary0.27Small Cap
Sylogist Ltd.SYZTechnology0.11Small Cap
Innergex Renewable Energy IncINE.TOEnergy0.82Small Cap
Andrew Peller Ltd.ADW.AConsumer Discretionary0.19Small Cap
Boyd Group Income FundBYD.UNConsumer Discretionary0.29Small Cap
Exchange Income CorporationEIF.TOEnergy0.54Small Cap
Liquor Stores N.A. LtdLIQ.TOConsumer Discretionary0.40Small Cap
Whitecap Resources Inc.WCP.TOEnergy1.66Medium Cap

Reader Portfolio #2

Market Cap Diversification

Related: How To Rebalance a Stock Portfolio

Portfolio Diversified?

This portfolio is not currently diversified. It is largely exposed to energy, technology and consumer discretionary. Some technology companies operate in specific fields and it might be tempting to associate them to those sectors but I find that technology changes so fast that a new competitor could always be around the corner. As such, companies like Davis+Henderson (DH) are still technology companies even though their clients are all financials.

Even though 4 sectors are highlighted as missing, there are 2 in particular worth pointing out and those are Healthcare and Real Estate. Being a very Canadian portfolio, it’s understandable to not see much on the healthcare side but there are good REITs worth considering. The energy sector is also interesting as many of the investments are small companies compared with the really big players such as Suncor (SU) or Husky (HSE) or Imperial Oil (IMO) to name a few. Many of those companies were income trusts with higher yield prior to the tax changes and it might be why they are part of the portfolio. (I may add yield for the next portfolio review)

Normally, being invested exclusively in large cap is not a risk as those companies are usually leaders and consequently own a large market share. However, the opposite can be risky. I find that this portfolio has too many small cap holdings. It may be great for growth at times but still, they can be vulnerable.

One part of the portfolio that we can’t see is how much is invested and in some cases the number of investments is not representative of the amount of money exposed to risks. For example, CDL.A, ADW.A and LIQ are all in the liquor business and probably the top 3 Canadian holdings in that sector. Is the investor spreading risks across the three of them or is it too many holdings.

Also worth noting (and I might add this in the future) is the P/E of some companies. BYD.UN trades at a really high P/E and also a number of other holdings are in the 60.

In summary, the portfolio is not fully diversified and some risks is identified in a couple of areas through the holdings of many small cap and high P/E holdings.

Related: How To Review Your Portfolio 

If you want to rebalance, you could subscribe to a Free Technical Trend Analysis to get indication of your stock trend.

Reader Portfolio Reviewed

Readers: What do you think of the portfolio diversification?

Disclamer: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk – see my full disclaimer for more details.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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2 Responses to "Are You Diversified? Reader Portfolio #2"

  1. Robb says:

    Too many small caps for my taste but I like the focus on ‘sin stocks’. Here’s to our many more years of oil relying, booze guzzling, and gambling!

  2. Martin says:

    I don’t like bonds. I believe dividend growth stocks can perform a lot better on the long run. So no bonds for me. Your small cap allocation in long run can provide nice return, but the volatility may be a bit too much for me either.

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