I’ve made significant changes to my portfolio lately.
Recently, I bought a new house to better cater to my family’s needs, sparking a series of financial adjustments.
In the past few months, I’ve been a net seller in the stock market, needing to raise funds for renovations on my current home (which will soon be sold) and the deposit for our new construction.
This has been a challenging process because, for years, my top priority when making investments has been to consistently build and compound my passive income stream.
That meant buying stock and adding shares to blue-chip dividend growth stocks.
Each new share I added was another step towards financial freedom.
But, life isn’t just about piling up shares of blue chip stocks.
My wife and I believe that our new home will improve our quality of life. And that’s worth spending money on.
The deposit has been made, but the question remains: how do I pay for the rest of our new home?
I don’t want to take out a mortgage at ~8%.
I’m not opposed to leveraging debt to my advantage, but I’m not a fan of high interest rates.
Thankfully, I don’t have to make a decision on how to pay for the house until next summer.
Mortgage rates have fallen in recent weeks and if that trend continues over the coming months, then I’ll happily go that route (ideally, I’d like to lock in a long-term rate of less than 6%).
But, if they remain elevated (or continue to rise) then I will likely sell more stock and pay for the house with cash.
I plan to sell my current home in between now and use the proceeds from that sale to make a hefty down payment on the new build. But, unless the sale price here is a lot more than several Realtors have suggested, I’ll need to dip into my portfolio a bit more to be debt-free.
Yes, allocating the cash from a home sale towards our primary residence as opposed to income-producing assets will hurt my passive income stream; however, it will also reduce my monthly expenditures in a big way.
To me, having a paid-off mortgage is a big part of being financially free.
I’ve done analysis on several different scenarios with likely return potentials attached to my investments (relative to mortgage rates) and I’m prepared to be flexible here.
At this point in time, I’m at the mercy of the bond market (with regard to where mortgage rates will be in 6 months’ time).
But, in the meantime, I wanted to write this article, highlighting the trades that I’ve made thus far, explaining their rationale, and discussing my plans moving forward (because I know that so many of you like to follow along with my portfolio management).
My Priorities When Making Sales
When thinking about my financial situation, there were several things I was not interested in doing.
First of all, I knew that I didn’t want to dip into my emergency funds (roughly 6 months of spending for my family) to pay for the new house.
Spending that money would have reduced the quality of my sleep. With two young kids at home, it’s poor already. I didn’t want to make it worse (I did insist that the builder insulate the walls of the primary bedroom in the new build, so hopefully my sleep will improve in the coming months).
Right now this cash is earning ~5% in a money market fund and I’m content to leave it there until I truly need it.
I also wasn’t interested in dipping into the cash that I’ve allocated towards bear markets.
As many of you know, when markets are hot I set cash aside every month that is earmarked for spending during the next broad market crash.
I have cash buckets that I plan to invest when the S&P 500 falls to -20%, -25%, -30%, -35%, and -40% levels relative to its all-time high.
I remain confident that the ROIs that I will generate when buying high-conviction stocks during a market crash will greatly exceed the ~8% returns that I could lock in by avoiding a mortgage right now.
Bear markets are when disciplined investors can make fortunes and I didn’t want to reduce/eliminate my ability to take advantage of these unique opportunities by spending my bear market cash on a house that will, in all likelihood, appreciate at a mid-to-high single-digit rate over the long-term.
Once again, right now this cash is earning ~5% in a money market fund and I’m content to leave it there until we see a significant macro sell-off.
With regard to a higher ROI than the high single-digit mortgage rates that I’m seeing right now, I wasn’t looking to sell any of my high-conviction secular growth stocks that have the potential to continue to compound their fundamentals (and their dividends) at a double-digit rate.
I’ve written a lot about my focus on accumulating perpetual compounders recently and those plans have not changed.
Looking at historical data, homes in the area where I bought have appreciated at a 6-8% annual clip (looking at 5, 10, and 15-year data sets). That’s well above the national average of 4.8% (according to Case Schiller, looking at data from 1987-2023).
Knowing that I’m buying in a hot real estate market gives me peace of mind as well.
Historically, my local real estate market has been very resilient (due to several large institutions and a large public University that drive constant growth). Looking at these structural local demand drivers, I don’t expect that trend to change anytime soon.
I’m thankful for that; however, I’m a realist. I know that the recent double-digit home price appreciation trends that we’ve experienced in recent years are not sustainable. Therefore, I don’t want to trade in a stock that should compound at a 10%+ rate for an asset that is almost certain to underperform on a relative basis.
So, now that you know what I wasn’t willing to do when making sales, let’s talk about the goals that I wanted to achieve when selling stock to raise cash.
The first thing I wanted to do when deciding which stocks to sell here was to identify my lowest quality and conviction holdings and start there.
In general, I’m always a fan of holding onto winners (so long as they’re not breaking asset allocation rules).
As the old saying goes, “You don’t want to cut your flowers and water your weeds.”
When I make trades, whether I’m buying or selling stock, I want to make sure that I’m improving the quality of my portfolio, overall. That’s what my perpetual compounder focus is all about.
Along these same lines, I was also happy to lock in losses when selling relatively low-quality holdings because I’m still sitting on massive capital gains for the year due to my decision to trim my overweight Apple (AAPL) stake earlier in the year when its rally pushed its weighting well up above the 10% threshold.
As wonderful as Apple is, I didn’t feel comfortable with that single-stock risk.
Generally, I hate the idea of locking in losses because when you own blue chips, way more often than not, unrealized losses become unrealized gains when you’re patient. But, reducing my tax burden is nice, so in several cases, I was able to kill a couple of birds with one stone when it came to selling lower-quality holdings and canceling out some of my Apple gains.
Something else that I considered when selling shares was portfolio redundancy.
In the past, I’ve been happy to build baskets of like-companies when I couldn’t pick a clear winner.
For instance, I own both Coca-Cola (KO) and PepsiCo (PEP). I own both Visa (V) and Mastercard (MA). I own Amgen (AMGN) and Merck (MRK). You get the picture.
Over time, these companies have all risen nicely, so I never felt the need to pick or choose.
But, when I think about my portfolio long-term, I don’t mind the idea of simplifying things and reducing my number of holdings overall.
When you make big financial decisions (like buying a home), you end up thinking about your legacy.
Managing a portfolio with ~90 stocks isn’t all that difficult for me because I’ve developed efficient systems for monitoring my holdings that coexist with my day job’s duties (equity analyst). But, when my time on Earth is done I pass my passive income-producing machine to my wife and/or my kids, I don’t want it to be overly complex (or time-consuming) for them.
My oldest child isn’t quite old enough to learn about the stock market yet, but that time is drawing near. When it’s time to teach her about investing and the family’s finances, I don’t want it to be intimidating or overwhelming.
I hope that she develops a passion for portfolio management because my goal here isn’t just financial freedom for my wife and me, but for generations of Wards to come.
So, I’m happy to cut out some unnecessary redundancy throughout this process and make this portfolio less daunting to pass along at a later date.
This will take time. I didn’t want to make any rash decisions or hastily rush out of positions. But, as you’ll see in a moment, I’ve trimmed down the weightings on many lower conviction picks, and over time, I would expect to see this trend continue as I begin to allocate more money towards my top investment ideas.
The Trades I Made
So, with all of that being said, let’s take a look at the trades that I’ve made as a part of this home-buying process.
Knowing that a move was in our future, I’ve been planning for this for months. I’ve been slowing building my cash position throughout 2023, providing the flexibility to make a move like this. But, when you sign a contract things get real. The need to pay a deposit was a major catalyst and the first trade that I made that was officially related to this home-buying process occurred on November 7th, 2023.
Buying APD & MAIN; Selling CMCSA & HRL
When Air Products and Chemicals dropped 10%+ after earnings, I knew I wanted to buy shares.
APD and its competitor Linde (LIN) are two of my highest conviction growth picks in the industrials sector. These industrial gas plays make the world go around…and they rarely sell-off.
Air Products’ sales came in below expectations; however, the business still looks very healthy to me.
Historically, APD has produced annual earnings growth during 17 out of the last 20 years.
APD’s annual EPS growth was in the double digits during 13 out of these 17 positive years.
And this reliable EPS growth has led directly to strong dividend growth.
During the last 20 years, APD’s dividend growth CAGR is 11.3%.
APD’s -10% plunge pushed its valuation down to the 20x forward level. That’s below my 22x fair value target.
I added to my position at $258.32, expecting ~15% near-term upside potential. Today, APD shares traded for $269.99, so I’m glad that I didn’t hesitate to buy this dip.
But, since the vast majority of my monthly cash savings are being allocated towards my renovation and down payment budgets, I was forced to sell something to raise funds to buy APD.
To buy more APD, I sold out of my Comcast (CMCSA) and Hormel (HRL) positions.
I sold CMCSA at $42.25 and $42.26, locking