Gaffer's Portfolio 

Rebalanced January 1, 2010

Gaffer's portfolio has now been operated for a full year and it's time to rebalance it. Some selections have done very well.

Freeport-McMoRan Copper & Gold for instance, bought at $24.44 and now worth more than three times that much at $80.29.

Goldman Sachs, a double from $84.39 to $168.84.

For those and others, it's time to take some profits to protect the gains we have already. This is an automatic process in that the formula requires no thought, just a little work with a pocket calculator and then some buying and selling. How many shares that means in this case can be found in the column market Share Change below.

The portfolio contains two of the five worst-performing stocks listed by one of the U.S TV business programs (I don't remember which): Wal-Mart and Verizon which, when taken together in the portfolio, just about broke even on the year though both were under water for a while.

The program missed our worst performer: Vulcan Materials, bought for $69.58 in the belief that the Congressional rescue package would help it. Now at $52.67, patience is called for. Eventually, stimulus should do some good. The company is the world's largest producer of the stuff used to resurface roads.

In a case such as Vulcan, diversification, dollar cost averaging and rebalancing, all components of The Gaffer Wealth System, are obvious aids. If this were the only stock we held, disappointment would be natural especially in an excellent market year. But it isn't. There are 20 others in this portfolio and overall wealth has increased by about one-third.

The company is sound, as it fell we have bought an increasing number of shares through dollar cost averaging, and rebalancing allows even more to be bought while taking some profit from other stocks that may be getting ahead of themselves.

All with no thought, worry, debate or puzzling!

And all in one hour of work per year!

Total value of the portfolio on December 31, its anniversary, was $32,062.26. Divided by the 21 stocks gives a total of $1,526.7742. This is the value each holding should have after rebalancing.

Some shares need to be sold from any holding with a greater value than this; the resulting cash needs to be redistributed among those stocks with a total value less than this so that, as closely as possible, each of the 21 will have a new total value of $1,526.77.

As I have said many times, a child could do this with a pocket calculator after brief instruction.

As the process is repeated over the years, we tend to buy low and sell high without having to figure out what the markets are doing or why. The only thing we need to keep an eye on is if there is something seriously wrong happening within a company, in which case we'd get out of it and into something else.

Since this is a model portfolio meant to demonstrate the value or otherwise of The Gaffer Wealth System, I am sticking rigidly to the rules. If this were your portfolio, you may choose to introduce a little commonsense flexibility.

For instance, there are extremely small changes in the value of holdings in some of the stocks that were already close to the portfolio average at the end of the year. You might choose to ignore those indicated changes given that a particular company may charge $5 or so if you sell.

One way to achieve the same result with no charge would be to adjust your next one or two months' investment. For instance Intel and Suntech were roughly $10 and $20 off the average and in real life I would have rebalanced via future monthly investments. That makes more sense than spending money unnecessarily on fees.

You see, once the framework of the system is a firm part of your strategy you can play with it a little bit and only when doing so makes sense. Just avoid playing with it too much or you will probably regret it.

Here, we have a demonstration of rebalancing and the sensible flexibility that can be introduced that could never be explained without an actual portfolio and a 'live' situation.

I hope this helps to fill in any gaps.