Choosing which stock to buy at first is hard enough, but once you have more than one, how do you manage them? Look through these five portfolio check points, and see how your set of stocks is prepared for the future. 1. Do I know what I own? This isn’t a trivia quiz to see how quickly you can rattle off the stock names. This asks whether you really know what the company does and how it does its business. If someone were to tap you on the shoulder and ask you to explain why you have Wesfarmers Ltd (ASX: WES) in…
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Choosing which stock to buy at first is hard enough, but once you have more than one, how do you manage them? Look through these five portfolio check points, and see how your set of stocks is prepared for the future.
1. Do I know what I own?
This isn’t a trivia quiz to see how quickly you can rattle off the stock names. This asks whether you really know what the company does and how it does its business. If someone were to tap you on the shoulder and ask you to explain why you have Wesfarmers Ltd (ASX: WES) in your portfolio, would you be able to list the companies it owns, many of which are well-known in their own right?
2. Why do I own them?
There must be a reason for a stock being in your portfolio, right? Did your auntie, who works at a bank, tell you the stock was going up? Was it because you like Donut King and Michel’s Patisserie foods that you bought Retail Food Group Limited (ASX: RFG)?
Knowing why you bought them in the first place is also a way to know when to sell. If it doesn’t perform as planned, then you can make a clear decision when to push the eject button. Keeping a diary of your buys and sells will eliminate the need to remember all the details.
3. Am I diversified?
Known as “the only free lunch in investing”, having different kinds of stocks spreads out the potential of getting poleaxed if the market goes haywire. If your favourite stocks in your portfolio are Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) because iron ore is on the up, you may be right about the commodity, but choose just one of them to cover that industry or commodity.
Out of every five stocks, invariably one will go up, one will go down, and the other three will range sideways for a while. Having stocks in different industries spares you the pain of doubling up on losses.
4. Am I really diversified?
Apart from different industries, have you also bought according to stock categories? Everyone is going to be a different, but for a good range you may want to buy a stalwart company, one that keeps going up slowly but surely, like Woolworths Limited (ASX: WOW) and a fast grower such as REA Group Limited (ASX: REA), which is up about eight times since 2009. Also add a defensive stock like healthcare company ResMed Inc (ASX: RMD). Also, a cyclical stock – something for a housing market boom like CSR Limited (ASX: CSR).
5. Do I know when to buy or sell my stocks?
Portfolio management is like gardening – you pull the weeds and grow the flowers. People usually do the opposite. When a “weed” is not doing what was expected and develops into a loss with not much prospect for a turnaround, investors are inclined to keep it because “you only make the loss when you sell”. No, the loss is already real and one thing worse than losing a $100 is losing $101.
For the flowers, investors often clip profits before they truly mature and bloom. If you had bought Domino’s Pizza Enterprises (ASX: DMP) for about $2.50 in early 2009 and sold it for even $5 around a year later, you would have patted yourself on the back for the 100% gain. Then missed out on the ride up to a $17.50 all-time high this month.
If the original story for buying the stock doesn’t change, then grow your flowers. If problems crop up, management makes bad decisions and the story changes, then don’t let it linger in your portfolio. Hope is one of the greatest enemies to investing. You can always get back in if the story improves, but don’t ride it down.
Investing can be fun, but you have to set up rules. Not every decision is going to be 100% right or wrong, yet being disciplined in your approach means that you eliminate the most common errors.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.