"Just out of curiosity, @madamswer, what is your target...

"Just out of curiosity, @madamswer, what is your target allocation for IRI? It currently stands at just under 6% of my portfolio, which is a level I am comfortable with. It used to be closer to 9% before the recent falls."

@thunderhead1,

That's a bit of an academic discussion because, for practical reasons, how much IRI I can own - even if I felt it was a very good investment - is limited by the fact that I am almost always fully invested and due to legacy issues in my portfolio.

What I mean by "legacy issues" is that I own somewhat a zoo of stocks (more than 40 of them, I'm not proud to say); this is because a great number of shares I own, I first acquired many years ago, and I am highly unlikely to ever sell them because of the capital leakage I'd incur due to the resulting capital gains liability.

As a case in point, probably two-thirds of my invested capital is in stocks that I have held for a long time and which I today think are either fairly-valued, or are over-valued (and this should not be surprising... when stocks perform particularly well, their weighting in a portfolio ends up being proportionally larger); stocks such as ASX, ARB, AUB, BRG, CBA, CGF, CSL, CTX, DLX, GUD, IAG, MQG, MND, NEA, NHF, ORG, REH, RHC, RWC, SCG, TCL, URW, and WES currently make up almost 70% of my invested capital, and very few of those I think are currently deeply undervalued.

The remaining 30% of my portfolio comprises stocks for which I already have as meaningful positions as I think is sensible, either due to issues of small capitalisation and/or liquidity; BOL, DTL, EMB, IFL, IRI, KME (fully-valued), KOV, LGD, LYL, NCK (fully-valued), SDI, SDF, SNL (very fully-valued), TME, VRT, ZNT, or because my level of conviction in upside investment return potential is not as high as it should be, eg. AGL, AMC, CYB, OMN.

So, even if I thought IRI was a sensational investment idea, it is hard for me to immediately fit much of it into my portfolio, unless I first disposed of some other stock.

And I certainly don't care to dispose of stocks that I've owned for a long time and which now represent significant capital gains tax liabilities in the event of a sale, and I don't care to sell other stocks which I think are more undervalued than IRI. [*]

Therefore, how much IRI I can buy at any given time is limited by incoming dividends (or proceeds from shares that I might sell on the rare occasion), and how IRI stacks up against competing opportunities at the time; for example, I have been selling shares in Amcor this week and investing the proceeds into IFL, which I perceive to be a better investment than IRI at this time. And whatever dividends I receive in coming weeks will at this stage probably be utilised into buying more IFL ahead of IRI.

Long and winded answer, I know (or non-answer, probably), but portfolio construction it is one of those individualised things which is dependent on all sorts of varying personal history and circumstances.


Of course, if the government tomorrow suddenly decreed the end of capital gains tax, and I was forced to build a concentrated portfolio from scratch - a portfolio which was constrained to between, say, less than 15 stocks - then I suspect it would look something like this (starting weightings in parentheses):

IFL: 15%
VEA: 10%
NHF: 10%
CGF: 7.5%
LYL: 7.5%
AUB (or SDF): 7.5%
IRI: 7.5%
AGL: 5%
CAR: 5%
MND: 5%
SDI: 5%
KOV: 5%
TME: 5%
ZNT: 5%

In that hypothetical case, to half-answer your question, my "target allocation" for IRI would be around 7.5%.


[*] PS. Yes, I am fully aware that actively maintaining a portfolio in which many of the components are considered to be fully-, and indeed over-, valued, is not conducive to optimal investment returns, but that's a result of the distortion brought about by the capital gains tax regime. I don't know what the solution is to this dilemma, and I would happily countenance any opinions that might help to address it.