A Smart Approach to Portfolio Diversification: My 2017 Financial Resolution

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From celebrity deaths to shocking political news, people found plenty to complain about in 2016. Me, though? I actually had a really good year. I met some incredible people, had unbelievable adventures, and learned a ton.

In the financial realm, I saved responsibly (even given the crazy-high D.C. cost of living) and added quality companies to my stock portfolio. Indeed, I'd say I pretty fully met my 2016 resolution to diversify. My next challenge -- and my resolution for 2017 -- is to take a smarter approach to finding stocks to buy by creating a watch list.

A look in the rearview mirror

Going into 2016, my portfolio was overweight in healthcare and largely packed with higher-risk growth stocks. I resolved to achieve more balance by finding stocks outside of healthcare, and established, dividend-paying stocks.

Overall, I think I did pretty well. Over the course of the year, in addition to adding to prior holdings, I opened positions in the following stocks:

  • Johnson & Johnson, which is a profitable, fairly predictable dividend payer.
  • Kinder Morgan, which gained roughly 65% by the end of the year and was paying out a 3.8% dividend at the time of my purchase.
  • Apple, which was my first move in a Roth IRA, and thus my first tax-advantaged buy. It's also a stable company with a growing dividend.
  • Wells Fargo, which I also sold for around the same price after my thesis -- largely based on corporate culture --collapsed.
  • Activision Blizzard, after an enlightening coffee chat with Foolish analyst Matt Argersinger, who convinced me that this stock is still in its infancy.
  • Chipotle Mexican Grill, in an attempt to get in on a Fool favorite at what I thought to be a bargain price.
  • Celldex, which now occupies a very tiny position in what I refer to as my "play" portfolio. I use this to open small positions in biotechs that excite me, but that I recognize are extremely risky. I do this mostly to hold myself accountable for my speculations.

I'd give myself a B rating for following my 2016 resolution. I did diversify pretty nicely, but I'm still missing exposure to financials -- particularly since I talked a big game this time last year about getting exposure to this industry. While I did purchase Wells Fargo, I never found a replacement financials stock after I sold off my position.

As I write this, healthcare is still the sector with the most representation in my holdings -- but it was narrowly trailed by consumer goods until two late-year healthcare pops reinflated that section of my portfolio. In any case, with the exception of the gaping hole of financials, the various sectors are much more evenly represented than they were going into the year. And in hindsight, this resolution was pretty wise, as my non-healthcare buys buffered the stinging biotech losses I suffered in 2016. (The broader industry, as measured by the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), sank 19%.)

My resolution for the year ahead

Looking ahead to 2017, there's still more work for me to do before I feel adequately diversified. I need to up my game in energy and industrials, and, of course, re-enter the financials space. This year, though, my resolution goes a step beyond just buying in: I'm going to resolve to be more analytical about when I buy. Specifically, I'm going to make a watch list.

In the past, my buying went something like this:

  • A company crosses my mind as intriguing.
  • I do a bunch of research on it: talk to Foolish analysts, read up on fool.com articles, print out a few conference calls to read.
  • If I still like it after doing my due diligence, I buy it right away.

I'd like to improve upon this process by forcing myself to be patient. I want to do my research ahead of time and come up with a list of companies that I like, along with the prices at which I'd buy in.

Now, let me be very clear that I'm in no way using this list to try and time the market. I simply think I should have my research already done on a sizable list of intriguing companies before a buying opportunity presents itself.

In particular, I'm looking to fill this list out with blue chip Fool favorites like Coca-Cola, Procter and Gamble, General Motors, Chevron, Verizon Communications, and Microsoft. I know relatively little about the inner workings of these businesses, but I owe it to myself to do some research and figure out what I think is an attractive price for each of them. While I'm at it, I'm going to summarize my buy thesis for each, as well as some areas to watch.

This organized, systematic approach takes some of the emotion out of investing, which is a huge advantage. When a stock hits my target price, and assuming nothing has changed about the business, I'll know I want to pick up shares for great reasons, rather than being temporarily excited about a company I just researched.

Who knows what 2017 will bring, but I feel confident that building a watch list will be the best financial move I can make.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Kristine Harjes owns shares of Activision Blizzard, Apple, Celldex Therapeutics, Chipotle Mexican Grill, Johnson and Johnson, and Kinder Morgan. The Motley Fool owns shares of and recommends Activision Blizzard, Apple, Chipotle Mexican Grill, and Kinder Morgan. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Celldex Therapeutics, Chevron, Coca-Cola, General Motors, Johnson and Johnson, and Verizon Communications. The Motley Fool has a disclosure policy.