HOW TO DITCH THE DUDS IN YOUR PORTFOLIO

In or­der to en­sure that you are meet­ing your goals and fol­low­ing a clear in­vest­ment strat­egy, you must re­move any un­der­per­form­ing stocks and su­per­flu­ous ex­change-traded funds from your portfolio.

Finweek English Edition - - FRONT PAGE - edi­to­rial@fin­week.co.za *The writer owns CSEW40, DBXWD and PTXTEN. By Simon Brown

af­ter the lo­cal mar­kets saw re­turns of al­most zero in 2016, any­one with a portfolio that ended the year in the green beat the mar­ket and can be chuffed with this re­sult. But to achieve mar­ket-beat­ing re­turns we need to fo­cus on the process of man­ag­ing our stocks within a portfolio be­cause over time one of­ten sees a portfolio drift­ing away from what one orig­i­nally had in mind.

Op­ti­mis­ing your ETFs

The first step is to check how much is in­vested into ex­change-traded funds (ETFs) ver­sus sin­gle stocks. I rec­om­mended a portfolio with a min­i­mum of 50% in ETFs. This fig­ure can be ad­justed to 100% if you’re just start­ing out. We pro­tect our portfolio from our­selves via ETFs as the big­gest risk to a di­verse portfolio is the in­vestor buy­ing rot­ten stocks and hang­ing on. Also, re­mem­ber your tax-free sav­ings ac­count – put the ETFs in there un­til the first R30 000 is in­vested ev­ery year.

The prob­lem with ETFs is that if you’re not care­ful, you could end up hold­ing a mixed bun­dle of ran­dom ones. How of­ten over the last few years did you buy an ETF on a whim? Ei­ther be­cause it was new and shiny, or some­body was punt­ing it hard, or maybe just be­cause sud­denly Ja­pan seemed ex­cit­ing so you bought the Ja­panese ETF? Then, af­ter a few years, you end up with a col­lec­tion of ran­dom ETFs that is pre­vent­ing you from fol­low­ing a clear in­vest­ment strat­egy.

I did a clean-out of my ETF portfolio last year as I had suf­fered from this ex­act prob­lem – I had a num­ber of small po­si­tions in ETFs that served no pur­pose.

A sim­ple di­verse ETF portfolio just needs three ETFs: CSEW40*, DBXWD* and PTXTEN*. This gives you di­ver­si­fi­ca­tion across sec­tors, as­sets and cur­ren­cies/ge­ogra­phies. If you want to re­duce risk, you can add some bond or cash ETFs into the mix. But adding sev­eral oth­ers is not likely to im­prove re­turns and sug­gests a lack of strat­egy.

Just sell that un­der­per­former, even if the bro­ker­age fee is higher than the value of the shares – it’ll never make you money and is cloud­ing your think­ing with painful mem­o­ries.

Kick the dogs out

When the ETFs are cleaned up, you move on to the in­di­vid­ual stocks. Here I want around 10 to 12 stocks and they must be the best of the best, some­thing I have of­ten writ­ten about.

But first I want to deal with those dogs lurk­ing in your portfolio. At some point ev­ery portfolio con­tains a dog or two that needs to be swiftly dealt with. It could be a stock you bought (usu­ally a small cap) on some hot idea or tip with the ex­pec­ta­tion that it would soar higher in dou­ble­quick time but in­stead it slowly col­lapsed into a heap.

An­other way dogs man­age to creep into our port­fo­lios is in the form of fallen stocks – these would be stocks that were once high-fly­ers but that just lost their way. This may be due to chang­ing con­di­tions in their mar­ket, new com­pe­ti­tion or per­haps the com­pany just failed to evolve.

No mat­ter how these dogs got into your portfolio, they need to go. How do you know they’re there? They are easy to recog­nise be­cause of the way they make you feel ev­ery time you log into your portfolio – by that sink­ing feel­ing that set­tles in your gut. You made a mis­take and you know it, but find your­self un­able to do any­thing ex­cept hope that things will im­prove one day. But they never do.

So just sell that un­der­per­former, even if the bro­ker­age fee is higher than the value of the shares – it’ll never make you money and is cloud­ing your think­ing with painful mem­o­ries. So, sell it. Sell it right now, I’ll wait.

A last im­por­tant point: af­ter the clean-up, have a look back at how these stocks or ETFs got into your portfolio and at­tempt to put in place rules that will pre­vent this from hap­pen­ing again.

When the ETFs are cleaned up, you move on to the in­di­vid­ual stocks. Here I want 12around 10 to stocks and they must be the best of the best.

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