Based on the requests and questions on how to build a portfolio using OSV Online, and our stock grader called “Action Score”, I’m revealing the 2017 model portfolio that I’ll be tracking throughout the year.
A reader mentioned that I should do something like crossing wall street.
Here are the rules for the portfolio.
- No changes until end of the year, UNLESS a company is bought out and needs to be replaced.
- 20 stocks @ $5k each for a $100k portfolio
- A grade stocks (but can include B if not enough A’s)
- No OTC stocks due to many people not wanting or being able to buy them (nothing wrong with OTC stocks though)
The Original 2017 Portfolio
I call this the Original Portfolio – but it’s not the 2017 version I will track.
This list has 7-8 retailers in the list. Out of 20 stocks, that’s at least 35% of the portfolio in a single industry. This is the only instance where I meddle with the portfolio.
At most, I include 2 stocks from the same industry.
That’s my rule of thumb as I’m after a diverse range of stocks to limit the downside.
35% of a portfolio in a single industry is too risky because if the economy tanks, retailers are the first to go.
Fashion products like Vera Bradley (VRA) and Michael Kors (KORS) make me nervous.
In this list, I purposely removed OTC stocks as I figure that 90% of investors won’t be buying them. As a model portfolio, the idea is to make it realistic.
My rule of thumb is 2 companies in the same industry. I get away with 3 sometimes if the business is completely different.
E.g. I would not own 3 clothing retailers. But if one was a chocolate store, one was in car auto parts and the other was a discount store, that is acceptable.
Revealing the Selected Action Score Portfolio for 2017
These stats are based on a Jan 2 start.
Here are the extra stocks I removed based on the two per industry rule:
- CUO (removed due to volume. Can’t buy enough to build a position.)
My Personal Portfolio Building Tips for the Passive and the Active
The portfolio above is a model portfolio. When I reference the “2017 OSV portfolio” or “2017 Action Score Portfolio”, the selected list is what I will be referencing.
For the Passive Investor who wants to follow a quant strategy.
The model portfolios are simply buy and hold for one year strategies.
- What if a stock is bought out?
- What if a stock changes to an F?
- What if I can’t buy enough of a stock?
- What if I don’t want to buy a full position?
- What if I dollar cost average?
These are scenarios that I did not test in the backtest. With so many variables and possibilities, I wanted to keep it simple.
Make sure you refer to the summary of how I created the Action Score algorithm and the 2016 results which go into very deep detail.
I don’t have precise, scientific reasons or results to answer these questions, but I can give you some ideas on how to handle it.
For the Active Investor who wants to leverage the stock grades and Action Scores.
The most common question in addition to the one above is:
- What if the DCF or other stock valuation method says an A grade stock is overvalued?
The answer is another article, which I’ve already written in our tutorials and documents section.
Q: What if a stock is bought out?
Couple of options and ideas.
- purchase a new company with the highest rating at the time
- replace with another A grade stock
Q: What if a stock changes to an F?
This rarely happens.
Well, it did with CALM. If the stock is on a mega high from a very cyclical year, with the following year expected to drop, it will fall.
- In keeping with the original strategy, you can hold for one year.
- or sell and replace with a new A stock
- or sell and replace as it drops to a D
Q: What if I can’t buy enough of a stock?
If you are trying to buy an OTC stock and it runs up on you, WAIT.
Do NOT chase.
Based on the price, the value score could be affected. Wait for a day or two to see if the Grade and Score stabilizes and make a decision as to whether you should buy or wait for the initial price.
Q: What if I don’t want to buy a full position?
If you want to test the waters, you could break up your portfolio into 2 sub portfolios.
One for the Top 20 Action Scores, and another one for the Top 20 Quality Scores.
e.g. if you have a 200k portfolio, 100k could be assigned to buying 20 stocks from the Action Scores list. The other 100k could be used to buy the top 20 highest quality, value or growth stocks.
You end up with 40 stocks and theoretically, 2 portfolios. You’ve also spread out your bets more.
Q: What if I dollar cost average?
Keep an eye on the grade and scores and either put it equally into the top 20 or wait until you have enough for a full position and look for the next best bet.
2017 Action Score Portfolio Live