Selling off to succeed
Reviewing your portfolio is a necessary discipline.
Regular readers will remember that a few weeks ago I sold down some shares. This was a tactical move driven by a sense of difficult times approaching sharemarkets. I did not sell everything but lowered risk and moved from about 50 per cent in shares and property trusts to 40 per cent.
This public cull of my portfolio created a bit of chatter concerning the wisdom of such a move.
However, I got fewer questions about whether turning bear was the right thing to do and many more about how I went about culling investments – how did I choose which companies to sell and which to keep? Did I work to some set of principles and, if so, what were they?
Well, I did work to some principles, some of which proved easy to follow and some more difficult. The first principle was easy: I retained all of the listed property trusts (LPTs) that I have in the portfolio.
Although the LPTs can be volatile when times get tough, they do have defensive qualities: this is partly because even though the share price may fall, the dividends generally keep coming. It is always possible that dividends reduce a little but they are likely to stay fairly healthy, giving good income returns in all but the very worst crash.
The other defensive quality of the LPTs is that when the economy turns bad, interest rates will usually fall. Low interest rates are good for LPTs as they reduce the interest expense which is one of their biggest costs.
The second principle is that I maintained the split that I have set myself between Australasian shares and international ones. I sold a little more of my UK holdings than anything else (Brexit was a worry) but other than that, worked hard to ensure that I maintained 40 per cent of the portfolio invested outside Australasia.
The third and most difficult principle was to ignore the price that I had paid for each company. This was difficult because as I cast my eye down the list of shares that I own, I found it near impossible not to look at the column which showed the cost of each. I can vouch for how difficult it is to sell something for less than you paid.
I am not a natural seller of investments: I try to buy quality and hold on long-term and I do tend to become emotionally attached to investments.
To decide which investments to cull requires consideration of the quality of the investment, forgetting the past and focusing on likely future returns. With investment, both buying and selling, only the future matters – the past is irrelevant.