Thursday, September 29, 2011

A sample defensive portfolio

As I was chatting with my wife regarding investment and how can we, the small investors, protect ourselves from the current wild emotion of Mr Market. The recent eurozone news triggered the roller coaster effect of the stock market. How are we affeted by that and how can we protect our investment from the effects?

I have included here a sample portfolio for the elderly. This portfolio is a real-life example that I recommeded to an old couple. The shares were bought one year ago and you can take a look at the percentage dividend yield and the returns on invested capital.

A defensive portfolio for the elderly

as at 29 Sept 2011
Stock (No. of shares)Buy at1-year dividendRealised profitUnrealised profit
Cerebos Pacific (2,000) $            4.48  $                640.00  $              640.00  $                  560.00
Popular (50,000) $            0.15  $                500.00  $              500.00  $                  400.00
OCC 5.1% NCPS (200) $        105.00  $            1,000.00  $          1,000.00  $                  (20.00)
 $  37,460.00  $          2,140.00  $                  940.00
% Yield5.7%
ROIC (%)8.2%

This couple was very satisfied with this portfolio which can give them a passive income of $2,140 in the year 2010/2011, compared to only $352 if they put $40,000 into fixed deposit that pays only 0.88%.
The price to buy Cerebos Pacific and Popular shares were calculated using my own formula before recommending to the couple.

Please note that these shares were bought in mid-2010, when the STI index was at 2987.70. The index closed at 2708.13 yesterday. This portfolio gained 8.2% (including dividends) while STI index lost (9.4%). This portfolio beat the STI index by a margin of 17.6%. I would have considered this an achievement.

What are the lesson that we can learn from here?
1.  Value investing is timeless. You can buy undervalued stocks anytime.
2.  A defensive portfolio is able to let you have a good night's sleep. Even during these uncertain times in the eurozone, this portfolio is still able to give the couple a dividend of more than $2,000.
3.  Buying and holding stocks that are not actively traded can protect your portfolio from the effects of news.
4.  Buy businesses, not stocks. Cerebos Pacific is a company that produces Brand's Essence of Chicken, Popular is a company that is known to almost everyone in Singapore.
5.  Buy a high yield preference shares can almost guarantee every dividend payout at a fixed rate.
6.  Buy at the strike price and not any other price.

The couple will still be holding on to this portfolio for the next couple of years to enjoy the high dividend yield. Will update on this portfolio at the same time next year. So do keep a lookout.

Happy investing and cheers!

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