Avoid these four common portfolio mistakes!

Are you one of the lucky (or should I say, smart) investors who took advantage of the share market bottom in mid-2012 and now hold a portfolio of stocks that have risen strongly?

With the Australian S&P/ASX 200 index (ASX: XJO) now up over 35% since its low in mid-2012, now may be the time to take a long hard look at your holdings. Every investor will look at each portfolio differently depending on their goals and risk profile, but there are four common mistakes that investors of every experience level make.

  1. Selling a stock because it’s done well
  2. Not selling a stock because it’s done well
  3. Selling a stock because it’s done poorly
  4. Not selling a stock because it’s done poorly

The first two mistakes are ones which investors may look back on in six months’ time and ponder. Depending on which way the share market goes from here, we may lament either a decision to hold or sell. A prime example of stocks in this category are our big four banks; ANZ (ASX: ANZ) is up 49%, Commonwealth Bank (ASX: CBA) is up 48%, National Australia Bank (ASX: NAB) is up 46%, and Westpac (ASX: WBC) has led all comers, up 57% since mid-2012. As all Foolish investors know, past returns are no indication of future success so these stocks require some further investigation.

For value investors, who look for companies trading below their intrinsic value, the banks most likely no longer satisfy their investing methodology as returns in the future are unlikely to outperform the index. However, for income investors who bought over 12 months ago, the banks are now yielding up to 10% based on last year’s purchase price. So, just because they’ve risen strongly doesn’t necessarily mean they’re automatically a sell, depending on your goals.

Conversely, investors can be overly protective of stocks that have fallen. We often hold onto losing stocks longer than we should, believing that they will rise from the ashes. Some examples of this might be Qantas (ASX: QAN), Fairfax Media (ASX: FXJ), or Dart Energy (ASX: DTE). All three are down over 50% over the past five years as structural changes in their industries have impacted earnings.

Many investors, including yours truly, have held onto stocks for far too long believing that the downward trend will reverse in order to ‘just break even’.  This is often a bad move and investors should consider whether the reason for share price underperformance is likely to continue impacting earnings in the future. For the three stocks above, it’s clear that changes in their respective industries have permanently changed the playing field, making future share price gains less assured.

Foolish takeaway

At the end of the day, the most important question for any investor is whether a stock can continue to perform as they have in the past, or even better. By reviewing the maintainability of the company’s earnings and dividend, investors can get an idea of whether to hold or sell over the short and medium term. For example, most analysts expect the banks to maintain or grow dividend payouts with inflation in coming years, while Qantas continues to face severe competition domestically and internationally, making its future performance more difficult to gauge.

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Motley Fool contributor Andrew Mudie owns shares in DTE.

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