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Investing Basics: Portfolio Management – should you stay or should you go?

September 2020

Categories: DIY Magazine

DIY Investor is dedicated to long term wealth creation; sister site Muckle wears its heart on its sleeve in its mission to educate and engage the next generation of investors – ‘mony a mickle maks a muckle’ is pretty much Savings and Investment 101 – writes Hannah Barnaby.

There are plenty of places for wham, bang, thank you ma’am traders looking for a turn; equally there are plenty of snake oil salesmen seeking to lure them with the siren call of a quick buck.

Much is written about stock selection; I recently wrote an article about portfolio construction – ‘How I construct my Equity Portfolio’ – explaining that I hold a small number of great companies that I really understand and themes that are complementary.

I don’t tinker around with my portfolio because of the headwind of trading commissions, but at some point even the most ardent buy-and-hold investor may consider a re-think; it may be that the investing landscape looks very different on the other side.

When the oil price turned negative, an ill-advised band of newbie investors attempted to catch the falling knife – ‘Gamified Investing Apps can Seriously Damage Millennials’ Wealth’ – and many will carry the emotional and financial scars; the assumption was that oil prices would rebound because, well it’s oil, isn’t it.

However, changes in behavior post-pandemic could mean that certain sectors – travel, for example – are never the same again; the flip side could be a company like Zoom which saw its revenues increase by 355% in the three months to the end of July  – if home working continues, is this the new norm? And if so, where now for commercial property investment?

However, changes in behavior post-pandemic could mean that certain sectors – travel, for example – are never the same again; the flip side could be a company like Zoom which saw its revenues increase by 355% in the three months to the end of July  – if home working continues, is this the new norm? And if so, where now for commercial property investment?

It may be that the factors that attracted you to a particular company or sector have altered, and it may be time to reassess; however, this should always be undertaken in a measured way that weighs the new evidence and comes to rational decisions.

DIY investors are often lampooned for buying high and selling low, but even the best professional investors struggle to time markets.

If we accept that it makes sense to re-evaluate your portfolio every now and again, it makes sense to understand some of the influences, subliminal or otherwise, that can colour your decision making, to ensure that your portfolio management skills pass muster.


When do Long-term Investors Sell?

Some investors take a short-term view, seeking opportunistic trades that will deliver good returns in anything from a few weeks to several months; they will typically set a target level, perhaps 30% above the buy price, at which point they will sell.

Setting targets can be helpful, in that it can help control human emotions which sometimes cause people to become either too greedy or blind to their own mistakes.

Using stop losses – a fixed point below your buy price at which a sell order is automatically triggered if things go wrong – can be useful, but I believe that rigid adherence to targets can have limitations both in terms of upside potential and the ability to stay invested in a company suffering a short-term setback from which it can recover in the longer-term.

I always invest for the long term, and in my experience most ordinary investors follow the buy and hold approach, looking for stocks they can own for the long-term – a strategy adopted by well-known investors such as Terry Smith and Warren Buffett.

I look for high quality stocks – trusted brands with great products and services, strong management and a good track record; if I can buy in at a sensible price, these stocks should produce above-average returns for years to come, and I should not need to keep chopping and changing.

However, events such as the pandemic, and it needn’t be a black swan event, it could just be natural evolution or technological change, can cause even investors like me to reassess.

There are a number of reasons why a long term investor may hit the ‘sell’ button; typically it’s because the company isn’t progressing as well as they originally expected, or there has been a change in the competitive landscape.

Sometimes, it may be that the investor takes the opportunity to lock in a profit if they believe that the stock has achieved an unsustainably high valuation.

Common reasons for selling are:

·         You need the money

·         The investment case for a company has changed since you bought in

·         The valuation has become too high and your trigger fires

·         You are losing sleep because you regret an investment

·         The share price has slumped and you’re bounced out by a stop loss

·         Your portfolio has got out of shape and you’re rebalancing

·         You’ve seen a better investment opportunity


Taking profits

If you are fortunate enough to see one of your stocks galloping away, you may be tempted to cash in. However, having got it right, why shouldn’t you keep on being right and benefit as the price keeps going up?’; a nice problem to have, but a problem all the same.

In this scenario I take some of my profit and still retain some shares; how much profit you take is up to you but I generally take enough profit to cover my original investment, which then gives me a free ride in the hope for future share price gains.


Classic mistakes made by investors

Although it is tempting to believe that those in the tall building are investing machines, devoid of emotion and inert to psychological biases, that is not the case, and whilst there may be more checks, balances and safeguards than are available to the average DIY investor, the stakes increase exponentially with the addition of a number of noughts to the transaction.

So whether a high-rolling professional investor, or a hobbyist seeking to augment your income in retirement, there are certain behaviors to be aware or avoid:

Don’t be greedy – don’t get carried away when share prices are rising strongly and assume a stock will go up forever; it won’t.

Don’t fall in love with an investment – critically reassess your investments on a regular basis and do so as a dispassionate investor rather than as a groupie.

Don’t succumb to fear – short-term problems can often cause significant price falls if an investor doesn’t have a sufficiently long time horizon. Investors may sell out because they think that the temporary problems mean the shares won’t go back up and this can become a self-fulfilling prophecy if it causes enough investors do follow suit. If prices continue to fall it can cause panic, as other investors assume the problems are worse than they realised; at this point rational, long-term investors can achieve excellent returns by buying during periods of fear with a contrarian mindset.

Don’t panic when markets are falling – when screens turn red and markets crash, investors need to keep calm and ask if the investment case has changed for each company in their portfolio; if nothing has changed, do not panic sell.

Don’t tinker – investors can be tempted to over trade, chasing a ten-bagger or the next big thing, or merely out of a belief that they should be more active; this tinkering around incurs trading costs which can add up over time and rarely improves the performance of a well structured and managed portfolio.

Keep Calm and Carry on

Stock markets go up and stock markets go down; this is completely normal as they reflect world events, politics, and a myriad of other influences.

I have taught myself to filter out such short term noise in pursuit of my long term objectives; by keeping a watchful, but not obsessive, eye on my portfolio, I know that nothing is completely bent out of shape, and I should never be forced to sell in a panic as either my personal, or market conditions, shapeshift.

However uncomfortable it may seem when you first see the value of your portfolio heading south, investors should not fear occasional swings in the market; use spells of extremely volatility to reassess your portfolio.

As with many aspects of investing, there is no silver bullet; the key is having a disciplined policy on why you buy, how long you hold, and when you sell.

And, as with many aspects of investing, this is a very personal experience – it took me a number of years before I could instinctively feel what was the right decision for me in any given circumstances, and I worked out that I had being doing what I thought I should do, rather than what felt right.

I now find myself acting in a way that feels entirely natural, but is layered onto a methodology that I have become comfortable with over many years; if you can be disciplined over the long-term you can have a better chance of growing your investments and achieving your financial and life goals.

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