Investors tend to give their portfolio half of the attention
#-ad_banner-#They add stocks and funds to the mix, presumably
making a commitment in dollar value that is commensurate with the
perceived risk of any investment. But once an asset makes it into
their portfolio, they don't always actively monitor how the
investment is faring -- or how it fits in with the changing
economy. Years may pass before you take a fresh, deep look at
what you really own. I have met many investors who own a hundred
stocks or more, simply because they could never know when to sell
any particular investment.
Here's a simple, four-step method to make sure your portfolio
is in fighting shape.
|1. Focus On Weightings
It's often wise to let your winners ride, especially if the
news that propelled shares higher continues to flow.
But your best portfolio picks can eventually start to
account for an outsize portion of your portfolio. There's
no great rule of thumb about how much is too much, but
generally speaking, any one holding that has come to
represent 15% or 20% of your portfolio needs very close
scrutiny. Unless you have done an extra amount of research
that gives you high confidence that this investment is
poised for more gains, it's time to start trimming back.
Selling half of the position would likely bring it back in
line with other holdings, on a relative weighting basis.
In fact, it's wise to periodically calculate the
relative weight of all your portfolio holdings, which sets
a clear picture for step two.
|2. Too Much Industry
Once you have calculated the weight of each holding, you
should then group them together by industry and sector.
Often times, a particular industry will hold great
appeal in terms of value or growth, and investors may take
stakes in several key players. But if more than 25% of your
portfolio ends up being directed toward just one sector or
industry, then it is carrying too much risk. Focus on the
best investments in the group, and look to sell any
holdings that provide redundant exposure.
In a similar vein, you should also identify the beta of
each of your investments (which you can find on
, Morningstar and other key websites). Although stocks with
a high beta have performed especially well in the past five
years, there is no reason to think high-beta stocks will
continue to lead the pack. Remember:
A high beta also signals high risk
An ideal portfolio has a beta between 1.0 and 1.5. So if
you are off the charts with this metric, then you can
either sell your holdings that have the highest beta, or
add stocks and fund to the mix that have a beta below 1.0
(Typically, defensive stocks such as utilities and other
industries that are characterized by slow and steady
You can calculate your portfolio's beta by identifying
each investment's beta, and then multiple it by the weight
it has in the portfolio (i.e. an investment that is 15% of
the portfolio would have its beta multiplied by 0.15). Then
add up the whole set of them to get a total beta for the
|3. Take A Fresh Look At Your
An investments that slumps in value often stays put in a
portfolio. Investors figure that "this stock was once worth
more, and it will be worth that much again...someday." Yet
that's not the way to view these lagging holdings.
Instead, look at every stock in your portfolio through
the prism of "would I buy this stock right now with fresh
funds if I didn't own it already?" If the answer is no,
then there is really no good reason to keep holding it,
unless there are tax-related implications. Unloading the
dead weight not only frees up cash, but provides a
psychological boost as you are now only focusing on your
best ideas, and not forced to look at your investing
mistakes on a daily basis.
|4. Pairing The Macro And The
Once a year, Wall Street analysts and financial media
outlets try to provide a fresh look at the investment
landscape for the year ahead. It's a useful exercise,
though it need not be done only at the start of the year: A
broad mid-year assessment is also helpful.
Such assessments help us to see where pockets of
strength in the domestic and global economies are emerging,
and where pockets of weakness are also emerging. By taking
the pulse of economic trends, you can then be sure that the
macro backdrop is well-represented by your portfolio
To be sure, it's OK to have some contrarian
representation. For example, retailers are seeing weak
sales these days, but many best-in-class retail stocks
represent such solid value that it's OK to buy and hold
them until retail prospects improve. The key is not to be
too contrarian with your portfolio positioning.
Risk to Consider:
The five-year bull market has been remarkable for its
consistent rewards. Growth stocks, such as the leading dot-coms,
have surged in value year after year. Yet in the next few years,
other sectors and asset classes may assume leadership, so it's
wise to have exposure to all corners of the market.
Action to Take -->
Actively reconfiguring your portfolio's orientation too
frequently may lead to a spike in transaction fees and capital
gains and losses realizations. So it's best to trim your
portfolio at the margin, like a hedge in your garden. Pruning the
outliers is the prudent approach.
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