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Stock portfolio management

Markets and personal circumstances change and it is important that you manage your stock portfolio regularly to ensure that it remains balanced and on target to achieve your goals, as well as to reflect any major changes in your life.

Your balanced portfolio can change with a surge in share price

Market movements can shift the weightings in your portfolio quite quickly, with rises and falls in different companies' share prices distorting the careful balance of sectors and stock types that you worked so hard to achieve.

For example, if you initially decided to invest 5% of your portfolio in mid-cap natural resource companies – cyclical, relatively high risk but with good growth potential – but the price of one mining company's shares suddenly surges, you could find these kinds of investments representing as much as 10% of your total portfolio.

Manage your stock portfolio regularly to ensure that it remains correctly balanced and on target to achieve your goals as well as to reflect any major changes in your life.

 

This means that relatively risky investments are now taking a bigger portion of your portfolio than the target you first set out for yourself. You may therefore want to sell some of your position in this company or one of its peers to bring resource companies' share of your portfolio back down to 5%.

Conversely, if you had determined that large-cap companies should account for 60% of your portfolio but a big pharmaceutical company you invested in has seen its share price plunge, this could cut the large-cap representation of your portfolio to as low as 50%. You are now relatively overweight on riskier small – or mid-cap stocks.

You could therefore sell shares in a small – or mid-cap company and reinvest them in another large-cap company to return to your target 60% level.

You could even buy more shares in the same pharma company whose price has fallen. Analyse that company carefully first of course, but it could be that you now have a rare opportunity to invest more money in it while its shares are cheap.

How to manage your portfolio

A successful investor should rebalance their stock portfolio at least every financial quarter and ideally every month.

Your first task is to accurately value your assets. Follow these steps:

  • Revise your original investment strategy, going through the original targets you set yourself in terms of what proportion of your portfolio companies from certain sectors, geographies or risk profiles should have.
  • Work out the current market value of your stock investment in each company.
  • Add these up to work out what percentage of the total you now have invested in each sector, etc.
  • Now compare this to your original target and work out how much you need to add or remove from each sector.
Every month or quarter, take time to calculate the value of all your investments and work out how much the weightings of your portfolio have shifted off target. Then rebalance them back.

 

You now need to actually rebalance the portfolio. There are a number of ways you can do this.

  • Sell shares in the sector or company type that now exceeds its target and reinvest the money into other investments that are under target.
  • Reinvest dividends from the sector or company type that now exceeds its target into other investments that are now under target.
  • Invest new money into the sector or company type that is now under target.

Bear in mind that there are costs attached to each of these methods.

You may have to pay broker fees to buy or sell shares.

In this instance, weigh up carefully those costs against the advantage of rebalancing your portfolio. If an investment is only 1% over target, for example, it might be worth waiting another month to see if your targets have re-established themselves naturally.

Also, selling shares that have risen in value may result in a big capital gains tax bill.

In this instance, you might be better off investing new money – if available – into your portfolio.

The power of dividends

Re-investing dividends, rather than taking the payment and spending it, can be a huge growth driver for your portfolio.

Re-investing dividends rather than spending them can make a dramatic difference to the ultimate size of your stock portfolio.

 

According to a Barclays study, £100 invested in equities at the end of 1899 would by 2012 be worth £160 in real terms.

If the same investor however had reinvested all dividends, the same £100 would by 2012 be worth a staggering £22,239, it found.

Of course, no individual investor lives for 113 years, never mind holds onto an equity portfolio that long. The figures show you however just how much difference your dividends can make.

The big question is where and how you reinvest your dividends.

The cheapest option is agreeing to let a company automatically reinvest the dividends it pays you in its own shares.

Reinvesting those dividends in another company can make more sense – especially as a tool for rebalancing your portfolio, as outlined above.

Stay on top of your stocks

As well as rebalancing your portfolio every month or quarter, you should also keep a close eye on the individual companies you have invested in.

Do not be afraid of dumping stocks whose long-term outlook has worsened, but be aware that trading too often will raise your dealing costs.

 

Using the same metrics you used to pick stocks in the first place – for example price to earnings ratios or technical analysis – make sure that the companies you have invested in still represent a good deal.

As long as the target weightings you have set for yourself – for example 60% large-cap – still suit your needs, do not be afraid for example of ditching one big OIL company for another as their growth or performance prospects change.

Factor in the cost of rebalancing

As with rebalancing your portfolio, however, it is important whenever you make any changes to your portfolio that you weigh up the benefits against any dealing costs. These can quickly erode the value of your portfolio if you are trading in and out of shares too often.

As a conservative investor you have already picked stocks that you think have long-term potential, so avoid the temptation of selling shares at the first sign of a downturn.

Remember too that markets are cyclical and if your portfolio has a planned 10-year lifespan it may well ride out any temporary market dips.

Life-changing events

One of the first tasks that you set yourself when you built a portfolio was assessing yourself – looking at your current financial resources and commitments, deciding what you wanted to achieve in the future, and therefore how much money you wanted to earn from your investments and how much risk you were prepared to take.

This task never ends.

At least once a year therefore, review your portfolio to check it is still right for your needs. You may have married/divorced, become a parent, lost your job or even inherited some money, and all of these will change your investment strategy.

If you have had a child for example, you may have less income to invest or may want to use more of it to buy a bigger home.

Conversely, you may want to start investing more for your child's education. This could mean you will change the time frame of your investment depending on when you will need the money. It could also mean you are prepared to take less risk on your investments.

As you approach retirement too, your appetite for risk will probably reduce as you want to lock in any profits that your investment has already made.

Many investors choose at this time to shift the balance of the portfolio to include only the safest equity investments, or even shift out of shares entirely and into fixed-income products like bonds or cash.

Review your stock portfolio at least once a year to take into account any life-changing events – parenthood, divorce, new job – that have changed your circumstances and investment goals.

 

Summary

In this lesson you have learned that …

  • ... it is important that you manage your stock portfolio regularly to ensure that it remains balanced and on target to achieve your goals as well as to reflect any major changes in your life.
  • … market movements can shift the weightings in your portfolio, changing your targeted balance of sectors and company types.
  • … once every month or financial quarter you should therefore calculate the value of all your investments and work out how much the weightings of your portfolio have shifted off target.
  • … you can then sell shares in the sector or share class that is over target and reinvest that money in sectors or classes that are under target.
  • … you could also reinvest dividends from sectors/share classes that are over target into sectors/share classes that are under target, or simply invest fresh money into under target sectors.
  • … reinvesting dividends rather than spending them can make a dramatic difference to the ultimate size of your portfolio.
  • … you should not be afraid of dumping stocks whose outlook has worsened, although trading too often will raise your dealing costs.
  • … you should review your portfolio at least once a year to take into account any life-changing events that have changed your investment goals and circumstances – for example, parenthood, divorce or career changes.