Page 30 - DIY Investor Magazine - Issue 25

INVESTING BASICS: PORTFOLIO MANAGEMENT – SHOULD YOU STAY OR SHOULD YOU GO?
DIY Investor is dedicated to long term wealth creation; sister site Muckle wears its heart on its sleeve in its mission to educate and engage the next generation of investors – ‘mony a mickle maks a muckle’ is pretty much Savings and Investment 101 – writes Hannah Barnaby.
There are plenty of places for wham, bang, thank you ma’am traders looking for a turn; equally there are plenty of snake oil salesmen seeking to lure them with the siren call of a quick buck.
Much is written about stock selection; I recently wrote an article about portfolio construction – ‘How I construct my Equity Portfolio’ – explaining that I hold a small number of great companies that I really understand and themes that are complementary.
I don’t tinker around with my portfolio because of the headwind of trading commissions, but at some point even the most ardent buy-and-hold investor may consider a re-think; it may be that the investing landscape looks very different on the other side.
When the oil price turned negative, an ill-advised band
of newbie investors attempted to catch the falling knife – ‘Gamified Investing Apps can Seriously Damage Millennials’ Wealth’ – and many will carry the emotional and financial scars; the assumption was that oil prices would rebound because, well it’s oil, isn’t it.
However, changes in behavior post-pandemic could mean that certain sectors – travel, for example – are never the same again; the flip side could be a company like Zoom which saw its revenues increase by 355% in the three months to the end of July – if home working continues, is this the new norm? And if so, where now for commercial property investment?
It may be that the factors that attracted you to a particular company or sector have altered, and it may be time to reassess; however, this should always be undertaken in a measured way that weighs the new evidence and comes to rational decisions. DIY investors are often lampooned for buying high and selling low, but even the best professional investors struggle to time markets.
If we accept that it makes sense to re-evaluate your portfolio every now and again, it makes sense to understand some of the influences, subliminal or otherwise, that can colour your decision making, to ensure that your portfolio management skills pass muster.
WHEN DO LONG-TERM INVESTORS SELL?
Some investors take a short-term view, seeking opportunistic trades that will deliver good returns in anything from a few weeks to several months; they will typically set a target level, perhaps 30% above the buy price, at which point they will sell.
‘I HOLD A SMALL NUMBER OF GREAT COMPANIES THAT I REALLY UNDERSTAND AND THEMES THAT ARE COMPLEMENTARY’
Setting targets can be helpful, in that it can help control human emotions which sometimes cause people to become either too greedy or blind to their own mistakes. Using stop losses
– a fixed point below your buy price at which a sell order is automatically triggered if things go wrong – can be useful, but I believe that rigid adherence to targets can have limitations both in terms of upside potential and the ability to stay invested in a company suffering a short-term setback from which it can recover in the longer-term.
I always invest for the long term, and in my experience most ordinary investors follow the buy and hold approach, looking for stocks they can own for the long-term – a strategy adopted by well-known investors such as Terry Smith and Warren Buffett. I look for high quality stocks – trusted brands with great products and services, strong management and a good track record; if I can buy in at a sensible price, these stocks should produce above-average returns for years to come, and I should not need to keep chopping and changing.
However, events such as the pandemic, and it needn’t be a black swan event, it could just be natural evolution or technological change, can cause even investors like me to reassess.
There are a number of reasons why a long term investor may hit the ‘sell’ button; typically it’s because the company isn’t progressing as well as they originally expected, or there has been a change in the competitive landscape.
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