Don’t neglect your share portfolio
Portfolio is the most important aspect of your business. Every mid-year, it’s very important to assess your share portfolio.
A number of investors who run their own portfolios via their stockbrokers often end up with a “neglected portfolio” or become frustrated with the performance of their portfolio. One of the key drivers of this frustration is that most portfolios managed by private investors suffer from both over-concentration and over-diversification. How is this paradox possible? They usually have a few shares that have done very well and come to dominate the portfolio and many shares that have done very poorly and start to become insignificant in the portfolio.
It is important to examine and assess your portfolio at regular intervals to ensure that it remains true to its goals. Here are eight ideas on what to watch for in your portfolio to avoid potential frustration:
Review winners to avoid over concentration
If shares perform well, don’t be afraid to take some profits. If the share continues to do well, you still have some in your portfolio, but if its fortunes do decline, at least you have taken some money off the table. No share can outperform the market indefinitely and even the greatest companies will eventually give market-like returns.
Avoid “Long Tails” through not selling out and buying more losers
Most investors like to look for new ideas in their portfolios and they typically don’t like to sell shares. They reason that either it has done well so don’t sell it, or it has performed poorly so don’t sell as it might bounce. Hence, over time, the portfolios get more and more names in them, with smaller and smaller weights. This is called a “Long Tail”. You want to avoid long tails.
Beware of holdings that make up small fractions of your portfolios, for example 0.2%. Even if these shares double in price, they won’t make a material impact on the portfolio’s performance. Either sell them or take them up to a material weight in the portfolio – we believe a minimum holding for any share in a portfolio shouldn’t be less than 2%.
But how do you assess whether to sell out or top up? If the original motivation for buying the share is intact, and it is near-term sentiment that has pushed the price down, then top up. If, however, the price has fallen because the original motivation to buy the share has gone, then sell.
Avoid biases towards well-known large-cap shares
Most investors often have a strong bias to large-cap, blue-chip shares. This gives them a sense of comfort and security, but will also hamper their performance in the long run. Over time, mid-cap and smaller companies outperform large companies so make sure you have a few good-quality mid and small companies in your portfolio that have attractive growth prospects. In other words look to include some future blue chips in your portfolio as well as current blue chip stocks.