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Thursday, February 09, 2012

Making Changes to Your Investment Portfolio

Dear all,

In my previous post, I have discussed how one can use a simple and yet efficient method to determine whether his/her investment portfolio is stable or not. The concept is really not to touch the portfolio unless it is really necessary. Using simple black box technique and dividend yield computation can determine whether it is necessary to make changes to the portfolio. If one had been following through his/her investment process dilligently, there should not be any need to make changes most of the time.

Now, let's say one had detected that the portfolio is not really that stable. Which means, there is really some junk stocks in the portfolio and it had affected the portfolio quite a lot. What to do next? Well, it is time to make changes but try not to make wholesale change. The aim is to minimize trades. Do minor changes with maximum impact. Some of the things to take note of when making changes are discussed below:

1. Assess and isolate problem. It is important to isolate the problem. Since we know that there is a problem, it might be contributed by only one or two junk stocks with high allocation in the portfolio.

2. Plan to make changes. The key is to make minimum change. So, have a plan to make changes after you assess and isolate the problem. You might not need to get rid of all the problem stocks in one go.

3. Make changes and collect more data points. After making the necessary changes to your portfolio, collect more data points and see whether your changes are effective. It is not the objective to have a perfect portfolio and end up with high turnover. Rather, we want to make small changes but big impact. It is an iterative (not once and forget) process to see whether your changes are effective or not. If necessary, one need to re-visit 1. and 2. again.

4. Reflect on your mistakes. What causes the portfolio to be unstable in the first place? Is it because the stock had ran up too fast? Or is it because the fundamentals of the company had become worse? Is it because your stock selection process and overweighting ideas are wrong? etc.

5. Gain acceptance. It is important not to look back too much on your mistakes. While it is not good to make investment mistakes, try to learn, accept your mistakes and move on. Continue what you had been doing. Try to fine tune your stock selection process as you go along but do not feel sad about it. Try to make it better the next time.

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7 Comments:

Blogger Everlearning said...

Hi ghchua,

Thanks for sharing your expertise and experience with your readers.
Investing is surely your cup of tea. I hope one day I can say that to myself.

Along the way, I have noted some good points you have shared at the beginning of this year. Evidently, no matter how cautious and painstakingly I picked up companies to invest, I have more good ones, some bad ones and none kaput. Just one, got suspended.

Last year, I added a few more counters into my portfolio; divested two counters, a few shares delisted (that's thus far the best gains)and decent dividends collected. I could easily wrote-off the losses from the banks' investments.

Taking this step towards DIY investments truly leads me to self-discovery of myself - it is never too late to learn something new.

6:11 PM  
Blogger ghchua said...

Hi Everlearning,

Glad that you made the move to DIY investments. Hope that you have enjoyed the journey so far.

The motivation of writing this piece is because I have observed that some investors had been switching stocks like nobody business recently during the penny stock rally. Today, it is penny stock A, tomorrow it is penny stock B etc. As long as they spotted the next one being played up, they discard the previous one and join in the next.

Making big changes in your investment portfolio just because of market plays is no way to manage your portfolio in the long run. Your portfolio might end up with a combination of rojak stocks which really doesn't make sense when the party is over. Rather than making minor changes to a portfolio that is working, you might have to do an overhaul of your rojak portfolio.

A lot of portfolio that I have seen have no change control mechanism. Meaning, there is no well-thought process of making those changes in the portfolio and review of the changes. Most of the time, it is because of funny reasons like - "Oh, stock A had already reached my profit taking level and it is time to switch", "I want to sell some in stock A to take back my capital" etc.

Have a portfolio view of your investments rather than focusing on individual stocks. It is only when you need to isolate a problem in your portfolio then you need to start to look at those that affects the portfolio. My motto is still - Minimum change, maximum impact.

8:50 PM  
Blogger Cory said...

I like that.

- Minimum change, maximum impact.

6:47 AM  
Blogger Koleen Ng said...

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9:22 PM  
Blogger Ben said...

Hi all

I can understand the difficulty in changing the portfolio. I started investing (knowing nothing at all) and made mistakes along the way. As time passed by, I gained some valuable lessons from these mistakes and am able to pick up the valued stocks. Think that it applies to the beginner investors and there are bound to be mistakes and the important thing is to learn from these mistakes and become better investor.

Ben

5:56 AM  
Blogger ghchua said...

Hi Ben,

The question we should ask ourself is - Shall we sell out of all those mistakes and then buy all the valued stocks?

My answer is no. I know it sounds a bit strange but it is ok to have some mistakes in your portfolio. Don't be in a hurry to sell them all out as they might recover. The problem with most people is that they tend to want to construct a "perfect" portfolio with all value stocks and think that only their best ideas deserves a place in their portfolio. Who knows, their best ideas might not be the best performers.

It is always good to open up your mind and look at all the stocks out there. I even have some concept plays in my portfolio. The critical thing though is to see how much of these risky stocks are there and whether it will impact greatly on your portfolio performance. If they have minimal impact, it might not make sense to sell them at all.

5:02 AM  
Blogger Ben said...

Hi ghchua

Thanks for your advice.

I do have some counters which are unlikely to recover to their original level. There is no point selling them as the current paper value are only 5% of the price which I bought at. I keep these counters to keep myself reminded of my mistakes. I don't harbour hopes that the price of these counters will rise higher than the levels which I bought at.

I agree that we should not rush into selling the bad counters and buy the "valued" one. There is no such things as "perfect". There are bound to be some flaws in the investing plan. I think that it is alright and normal to have such flaws. No one is perfect. The most important thing is to ensure that I do not make the same mistake. Nowadays, I tend to look into more parameters of the counters before investing my money in these counters. I must say that I have learnt to be a better investor.

I hope to be able to retire from my full-time in a few years' time (like you").

Ben

7:39 AM  

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A self-directed investor, looking to invest for retirement needs and bypass all those expensive financial planners/insurance agents. Investing is fun, profitable or most important of all, knowledge gained is useful for the rest of your life!

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