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Reviewing An Underperforming PortfolioPosted by securities on: 2006-09-22 10:53:29
By Michael Russell Volatility has done it again. What should investors be doing now? Those looking to rejuvenate their underperforming portfolios and capitalize on further market gains might have to bear their losses and research for the best possible holdings in the new market cycle. Thus, instead of panicking, selling existing investments and jumping into sectors which have either performed well recently or are the flavor of the month, the more logical course of action would be to review your entire portfolio. Sell any underperforming speculative stocks, evaluate other holdings individually, ensure you diversify across sectors and match your risk profile and look for companies that pay dividends. You should give your portfolio a thorough review. Investigate each investment carefully in order to determine if it's worth holding on to. Selling your investments because you've held them for a long time isn't the good solution and holding onto them isn't the answer as well. To determine if you should take profit, ask yourself if the price has gone up as high as they're likely to. Don't fall into the trap of holding on to something that has done well in the hope that it'll go higher. Like everything else, any investment that goes up will come down again as they'll get fully priced at some point in time. Bear in mind, over very short periods, speculative returns tend to overwhelm fundamental returns. Good returns in a year or so doesn't necessarily tell you that expected returns will be high. Therefore, trying to determine investment strategies, fund performance or security returns based on historical data can be misleading and inappropriate. The fact is, no one can be certain of performance or returns even over very long time periods. Whatever the strategy, remember that diversification is important. As a pool of investment, you may have generated good returns but the concentration of risk in a particular sector or a particular class of asset is a cause for concern. A restructured portfolio should include a healthy exposure to sectors that have been showing consistently strong gains in the past and carry with them the probability of future gains if global economic growth improves. Be cautious too when there's extreme interest in particular sectors; it's usually an indication that excesses from the last cycle still remain. Since the total return on investments is the sum of capital gains and any dividends paid to investors, a key consideration in investment selection is the dividend payout. This is crucial if you expect returns outlook in the form of capital gains to be much lower than the past. A good dividend payout will help compensate for the low returns. Evaluate the stock based on potential for improving distributions. A stock that has suffered an earnings downgrade will probably see its distributions suffer as well. Not only that, avoid companies that produce low quality, suspect earnings. As we have seen enough companies collapsing due to mismanagement, eliminate also companies with suspect management. Moreover, don't let short term events affect your decisions. Successful investors are thinking several years ahead and not about what is going to happen this year while not so successful investors, do the complete opposite. With investing, nothing is for sure and nothing in the stock market stays the same. As investors, you should try to navigate the stormy sea of market fluctuations. The performance of different sectors fluctuates with the economic cycle and returns will rise or fall. Michael Russell Your independent guide to Investing |
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