Threading Strategies Together

Several different strategies have been discussed here on Finance Monitor along with numerous individual investments and I thought I would provide some context on how to view the discussions in the context of your own investments. The fundamental goal of this post is to weave several different posts on different subjects together. I will try to provide links so that you can quickly look up the prior discussions.

I guess the proper way to start this conversation was with the prior post on risk reduction in portfolio construction. This is one way of looking at your macro strategy, though there are many potential variations on this broader strategy. Within the core portfolio, either use equity index funds or balanced funds and basically just try to keep your overall allocation right, unless you want to be a little more active here. Then, you can engage in what was discussed on the post on dynamic asset allocation.

To do this, use the SPY and TLT ETFs at a basic level. If you have less than $2,000, I strongly encourage you to only re-balance when interest rates suggest you make a large reallocation from stocks to bonds or bonds to stocks. If you re-balance with every twinge, you'll get eaten alive by commissions. For example, let's say the model changes each month and you re-balance with $7 commissions each time (on both purchase and sale) with a $2,000 balance. You will incur $14 a transaction 12 times for a total of $168 in commissions. That would be 8.4% of your portfolio or greater than your average annual gain. With $20,000, it's 0.84%, which is bad, but not ruinous. If you are so fortunate to get up to $100,000, the fees are very low indeed. The ETF fees for TLT and SPY are also very low. In the case of SPY they are 0.09% per year and 0.15% on TLT.

Stock Picking: Consumer Staples

Yes, probably the most boring sector, but one that is useful for analyzing when constructing the core positions of your portfolio.

As nearly anyone who knows me is familiar with, I have a large position in Procter and Gamble(PG). While this has performed well for me over the past nine and a half years, it is increasingly apparent to me that it may no longer be the best choice in the sector. In fact, it may not have been the best choice in the sector for the past few years.

Colgate(CL) and Church & Dwight(CHD)have been posting far better growth numbers as well as better stock performances in the last few years. P&G's earnings report this last week was fairly disappointing as well. It had appeared to be positioned nicely to move into the high 60s if only the earnings report and the subsequent forecast had been solid. Alas, they were not, and the stock has languished in the low to mid-60s for the past several months.

P&G is making significant efforts to increase its emerging markets exposure where there is plenty of growth potential, particularly in Latin America and India. The problem has been that Unilever, CHD, and CL are already a few steps ahead of them and have posted much better unit volume growth. That being said, P&G is fairly attractive if they can restore any form of growth at all. With $4.12 a share expected for next year's earnings, they trade at barely over 15x earnings, fairly cheap by their standards. That plus a 3.10% dividend make the stock palatable.

However, CL and CHD both trade at much the same forward PE and have a clearer forecast for earnings growth. CL has a decent 2.5% dividend as well, but CHD has a puny 0.81% dividend. Those differentials are important in determining which of these stocks to buy.

If I had to deploy new money right now to one of the three, CL seems to have the best story to tell on the three counts: growth, valuation, and dividends. Colgate's dividend may be lower than P&G's, but on the other two counts, it is vastly superior.