My Portfolio Management Methodology – Diversification, Rebalancing, and Performance Tracking

Portfolio Management - Portfolio diversification - balancing

Since I started my FIWOOT (Financial Independency Working on Own Term) journey to grow my liquid net worth in order to increase my passive income through dividends, I have been fascinated with the power of numbers and analysis in Microsoft Excel in performing my Portfolio Management.

Of course I am no Cathie Wood, the CEO of Ark Invest which hold 3.1% of Bitcoin’s supply. This means, I have to be more careful and do my homework when managing my portfolio. After all, I am not rich enough to take very big risks without facing severe consequences.

It took me some researching to come up with my current portfolio management system which will always be in “Work in Progress” status. This strategy helps me maintaining a balanced and diversified portfolio which leads to staying on track to achieve my desired passive income through dividends and growth yield.

In this article, I am going to discuss why and how I am tackling the portfolio diversification and rebalancing challenges. I will also talk about how I am calculating my liquid net worth and dividend income. There are 2 main numbers everyone needs to figure out in order to have a smooth sailing toward their FI. The 2 numbers are the required monthly income and the comfortable dividend yield. I will talk about my numbers in this post.

This post is not about how to perform these tasks in a spreadsheet (Google Spreadsheet or Microsoft Excel). It is more about the behind the scene methodologies. I will do another post explaining how my Excel Spreadsheet comes handy to do all the calculations for me which I use to do my Monthly Money Reports.

Main Reasons for Performing Portfolio Management Strategy

There are many reasons to track my portfolio’s performance growth and dividends from stocks and ETFs. However, the ultimate goal is to having a better and clearer understanding of my investments and where I am heading. I always liked numbers and statistics as I believe success comes from tracking progress and learning from mistakes.

Of course, one could just keep contributing to their portfolio without fully realizing how it is performing or where the weakness is. However, statistically speaking, setting clear goals and tracking progress leads to a higher success rate. To accomplish this “higher success rate”, I need to track and study my investments (and investment habits) and improve where it is required.

As I point out later, one of the main reasons to have a portfolio management strategy is diversification. However, the greatest investor of all-time, Warren Buffett, believes diversification is only required when investors do not understand what they are doing.

Warren Buffett - Diversification is only required when investors do not understand what they are doing.

As we all know, this is called Personal Finance. Hence, I am going to leave the decision on how much you would like to diversify to your judgment. I am satisfied with how I am diversifying as I cannot really predict the future. The main point is, as long as an investor is happy with the diversification and clearly see the success, there is no reason to change the strategy. Sticking to the plan is vital!

An alternative path is to go with an All-in-One ETF solution like one of below which saves a lot of management time to deal with rebalancing headache. However, it takes away the full control over the investments and adds an extra layer of fees (ETF Management Fees).

  • All-in-One Growth ETFs: VGRO, XGRO, ZGRO
  • All-in-One Balanced ETFs: VBAL, XBAL, ZBAL
  • All-in-One Conservative ETFs: VCNS, XCNS, ZCON

My friend Bob discussed these ETFs in details in this article. Here is the list and what I would like to always know about my portfolio:

  • Holdings Weight per Sector
  • Holdings Weight per Region
  • Holdings Weight for Each Type of Holding
  • Total Portfolio & Sector Performance (Excluding Dividends)
  • Dividend Yield on Price (YOP) & Yield on Cost (YOC)
  • Expected Annual Dividend (Forward Annual Dividend)
  • Liquid Net Worth

I am going to explain each of the mentioned above reasons briefly including some simple mathematical calculations. However, I will leave the actual Excel design to implement this strategy for my next post. So make sure to come back!

Holdings Weight per Sector

I tried to keep this factor simple without over-sectorizing my portfolio. For example, I consider both Banks and Insurance companies as Financial. I also considered energy transportation companies including pipelines within the Energy sector.

I see a benefit by tracking companies with similar performance in one sector which ultimately helps getting a more realistic diversification. For example, if energy commodities perform weakly, the companies transporting these commodities will also perform weakly.

As a personal rule, I am comfortable with a maximum 20% weight in each sector, and this includes financial sector including big insurance and bank stocks. I also keep each company’s weight below 5% in my portfolio. Obviously, the 5% doesn’t apply to ETFs.

Currently, I have 11 sectors which are Commodity, Consumer, Telecom, Technology, REIT, Financial, Energy, Renewable Energy, Utilities, Health, and Mix Sector.

Mix sector is for ETFs with a mix exposure to different sectors. Unless a heavy weight is on one sector, I consider these ETFs within the Mix sector. My current Mix ETFs are: BDIV, HBF, LEAD, VDY, VIU, XIC, XUU, and our beloved ZWC.

Holdings Weight per Region

I keep changing my mind about this part of the equation! There are so many factors to decide which regions are going to be performing well in the future. Adding all the tax complications to the formula, the more I learn the more I lean toward only owning Canadian companies.

However, Canada is only 3% of the total world market so it might not be the best choice to only have Canadian stocks. I honestly have a conflict but came up with a decision and for now focusing on my goal.

After researching and comparing the global market performance specially during Covid madness crash, I came with the conclusion that I do not need any exposure to the Emerging market. Emerging market is where citizens are mostly suffering and there is no democracy (Even comparing with the developed countries’ relative democracy). I am not saying China or India are bad countries by any means. I am just not convinced I need to invest in the broad Emerging Market.

I admit, some of my ETFs hold companies in the emerging market but I am not going to complicate things by trying to buy a solely emerging market ETF. However, if I wanted to do that, I would choose ZEM.

My only heavy on Emerging Market ETFs are Evolve Global Materials & Mining Enhanced Yield Index ETF (BASE) and iShares S&P/TSX Global Base Metals Index ETF (XBM).

You can read more about my analysis on the Best & Most Tax Efficient US & International ETFs Listed on TSX to find out why I chose ZEM.

After eliminating the Emerging market, I ended up with below strategy which I am sure will develop and change overtime while I learn more about investing. I should mention I only hold stocks and ETFs listed on Canadian Exchanges in Canadian Dollar and do not have any plans to change this strategy.

  • 50% Canada Market
  • 35% US Market
  • 15% Developed Market ex NA

My half investment in Canada Market is planned to be only stocks. Holding stocks will give me more control and reduce my fees. I have the time and energy to manage my own holdings, so I rather do this personally and avoid paying ETF fees.

As of the time of writing, I am also holding Canada Core S&P ETF XIC and Canadian High Dividend ETF VDY which I am planning to eventually sell and replace with Canadian banks directly.

For the US Market, I am holding XUU which is iShare Core US Total. In addition, I add to other ETFs which have their highest weight in the US market. I covered all my ETFs in this ETF series.

One of these ETFs are TRVL which is Harvest Travel & Leisure ETF tracking hotels and airlines. Another ETF is HBF (Harvest Brand Leaders Plus). I have all these ETFs explained in My Exotic Series of the Best ETFs in Canada.

For my Developed Market ex NA, I use VIU which is 58.3% Europe, 41.1% Pacific, and 0.6% Middle East. Japan is the biggest holding with 23% followed by UK 14.3%. Also, there are some companies from the developed world inside other ETFs which I count as Mix.

My Excel spreadsheet helps me stay on top of the numbers and rebalance accordingly. I am trying to avoid selling any stock in my investment portfolio.

Holdings Weight for Each Type of Holding

I have three type of holdings that I track. Stocks, ETFs, and ETFs with Covered Call strategy and here are my weighting goals:

  • 50% Stocks – All Canada
  • 35% ETFs
  • 15% Covered Call ETFs

All my stocks will be Canadian stocks with a 50% weight. I like the exposure to both non-Covered Call and Covered Call ETFs.

However, as mentioned in my previous posts about Covered Call ETFs, these ETFs require special attention and follow up. They are not a type of ETFs to buy and forget about. They need to be evaluated (Semi-Annually) and compared with similar exposure but non-Covered Call ETFs.

For instance, I would like to introduce you to TLF (Brompton Tech Leaders ETF). It pretty much behaves like NASDAQ’s QQQ (Or Hedged QQC.F) but pays a nice 3.98% dividend even though it holds less than 30 companies. I need to keep an eye on it to make sure it doesn’t fall behind NASDAQ.

One important personal note is that I might adjust the 35-15 ETF equation. However, for the time being, I am enjoying both growth and income from these ETFs. I believe finding the balance in any hybrid portfolio is a key to success.

Total Portfolio & Sector Performance (Excluding Dividends)

I like to see how my portfolio is doing in term of growth and performance without involving the dividends. I do not track the performance monthly as I am more interested in the all-time growth results.

Understanding how my portfolio is performing is very important. It helps my decision in rebalancing or any required adjustment. Total portfolio performance tells me the growth of my portfolio since the start of my investment excluding all the received dividends.

I also separately track the weight of each sector of my portfolio. I calculate the total contributions and compare with current value per sector. This helps realizing how each sector is behaving overtime and in rebalancing toward the 20% goal per sector.

Total Performance = (Total Market Value – Total Contribution) / Total Contribution * 100%

I should also note that I keep tracking my total portfolio growth including dividends for a more complete performance review of how the portfolio is doing. It is important to know if my portfolio’s growth is more from the dividends reinvesting or from the market appreciation.

Dividend Yield on Price (YOP) and Yield on Cost (YOC)

This is one of the most exciting parts of my portfolio to keep an eye on. I have a dedicated column for each holding to know my dividend yield on cost. YOC means what yield I am getting based on the price I paid for the stock or ETF.

Yield on Price (YOP) is the real yield anyone should pay attention to. This yield needs to grow overtime to show a healthy dividend payer company. YOP is the more meaningful and important yield to track.

  • YOP = Total Annual Yield / Current Price * 100%
  • YOC = Total Annual Yield / Average Purchase Price * 100%

Expected Annual Dividend (Forward Annual Dividend)

This is by far the most interesting number to look in a Financial Independency journey. The Forward Annual Dividend is the potential dividend that I will get paid each year from monthly, quarterly, semi-annual, or annual payments in my portfolio.

I basically track the payout for each stock and ETF. I then, multiply this by the number of shares I hold to get the total annual pay from each company.

The forward annual dividend will be the total payouts of all these companies (Stocks and ETFs). I then get an average of monthly payment by dividing the total by 12 which is the number of months per year.

How Much Do You Need to Be Financially Independent?

This is a very relative and personal question. Everyone’s choice of life is different. Some people would prefer a lavish retirement in fancy first class flights and 5 star hotels while others prefer to have their own camper van and drive around.

Where you end up living and the cost of that place is a major factor in making the decision. It is all about priorities and what makes you happy. The number is $3500 for some while it goes as high as $10K monthly for others.

I recommend reading this article from my friend Mark where he provides 2 case studies in addition to extra retirement resources.

For me personally, my goal is a $4000 monthly income. Here is a simple math to figure out how much I need in investments to generate this income.

Total Required Annual Income = Monthly Required Income * 12 = $4000 * 12 = $48000

Next, is to get an estimate of the annual yield. For me, 4.5% is the magic number on a balanced diversified portfolio including growth and dividend stocks. This number is different for investors but my goal is to keep it at 4.5% range so I am doing my calculations based on this realistic assumption.

Total Investments Required = (Total Required Annual Income / 4.5) * 100 = ($48000 / 4.5) * 100 = $1,066,666.

This means, to get an annual income of $48,000 which is going to be theoretically tax-free, I need to have a little over $1M in investment generating a dividend income with a 4.5% yield. Needless to say, if my yield is lower, I will need higher portfolio.

Liquid Net Worth

This is yet another important factor that I track. The more the better of course. For me, I have two criteria for anything to be included in my net worth:

  1. It should generate passive income while I sleep
  2. It can be easily converted to cash or be sold with a click

Therefore, my net worth is the sum of all my investments excluding items like home or car. Of course, if you have a rental property which is generating income, it should be included in your net worth.

Portfolio Management Methodology Summary

It is very important to understand how one’s portfolio is performing and when it needs to be improved. Investors should create their own methodology (system) to track their performance and growth to reach their goals or use one of the already proven available methods by utilizing ETFs.

In this post, I pointed out the theory behind how to have such a system in place. I do believe in a hybrid approach to have a balanced portfolio including both growth and dividend holdings. It is important to recognize your goals and how much you need to accomplish your financial independency.

In my next post, I will demonstrate how I created my Portfolio Management Tracker which shows me all the mentioned numbers in this post including passive income and total portfolio growth.

I hope you enjoyed reading this post. Please leave me your comments and share how you stay on top of your portfolio.

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