News, Culture & Society

Sell or hold? How to review your shares portfolio

Ben Staniforth is a research analyst at stockbroker Redmayne Bentley.

It goes without saying that keeping tabs on your holdings is a key part of both short and long-term investing.

Periodic reviews and stress tests of holdings help to not only ensure that you have the best possible assets within your portfolio, but also mean that overall portfolio and holding risk are being effectively managed.

This may seem daunting at first but following a small number of key steps on a regular basis can often save you both time and money.

We can split these into two distinct categories; event-driven reviews, those that are conducted following a significant shock; and regular reviews, which focus on effective portfolio management.

Stress test: Look at a firm’s share price and business performance relative to its benchmark or sector during troubled times, like the pandemic outbreak or the financial crisis

Event-driven reviews

Event-driven reviews are essential in a portfolio comprised solely (or predominantly) of shares.

This is particularly pertinent if the overall focus is on smaller-sized companies, where closer attention is a must.

The sensitive relationship between news flow and share price can lead to significant swings.

If a stock you hold has encountered difficulties due to a disappointing set of earnings or a particular news story, one of the first places investors should look is the company’s investor relations page on its website.

This will provide a reliable source of information. When reading, investors should ask themselves four key questions.

1. Has there been a fundamental shift in the company’s products and/or strategy?

2. Has management guided the company to lower profits and/or revenues for several quarters now?

3. What is the overall tone of the commentary from management? Do they seem concerned longer-term, or is this simply a blip?

4. Is this event repeatable, and are the firm’s peers struggling?

Asking yourself such questions will aid in analysing the company, providing a broad understanding of how it is performing and helping you decide whether to sell its stock.

In general, significant deviations from a firm’s central strategy should be met with stern scepticism, certainly warranting a review of its new strategy and assessing whether this fits with your own investment thesis.

Ben Staniforth: Significant deviations from a firm’s central strategy should be met with stern scepticism

Ben Staniforth: Significant deviations from a firm’s central strategy should be met with stern scepticism

However, stocks are regularly oversold on singular events, which have little or no effect on the company’s overall long-term strategy and performance.

An in-depth analysis of each significant share price decline for a company is likely to provide investors with many opportunities to purchase shares at a discount when they have been unduly hit, a process called ‘pound-cost averaging’. 

Regular reviews

As mentioned above, regular, systematic reviews of a portfolio are vital to ensuring that your holdings are performing as expected and the portfolio holding risk isn’t unnecessarily high.

But how often should you review your portfolio, and exactly what is the best way to accomplish it?

While this will depend highly on a number of factors, such as the assets within the portfolio and your investment horizon (long/short-term), it would be prudent to conduct a review every three to six months.

Before you rebalance your portfolio, there are two key questions that need to be asked: have the portfolio weights shifted significantly; and have your personal circumstances changed since your last review?

To answer the first question, an investor is highly likely to have both strong and poor performers within a shares portfolio.

This can, however, lead to the strong performers creating an outsized position within a portfolio.

While this is, in essence, a good problem to have, it is important for the portfolio not to become over-reliant on one or a small number of holdings.

On the second question, an investor’s need for cash in the coming months and their investment horizon duration will both impact their decision to hold or sell a stock and perhaps replace with either a lower risk company or even a different asset class altogether.

Free investing guides

As a general rule of thumb, as we age and our need for cash increases and our retirement date gets closer, we should be slowly starting to look at reducing the portion of risky assets in our portfolios.

That means selling shares and increasing the allocation towards more cautious assets such as government and corporate bonds and alternatives like commercial property, commodities and private equity.

The final step, then, is to plan and execute a rebalance of the portfolio, selling small portions of those shares that have performed extremely well and now occupy outsized positions and potentially re-evaluating the risk level that you are currently taking relative to your financial and personal circumstances. 

Stress testing your holdings

One of the best ways to stress test a portfolio is to look at both its share price and business performance relative to the benchmark or sector during times of stress.

Key events such as the 2020 Covid-19 pandemic, the 2007-08 financial crisis and the dot com bubble of 2000 can often help investors to identify those companies that usually take significant hits or perform strongly during times of economic uncertainty.

Whilst things will have likely changed in the time since such events occurred, the analysis can give investors an idea of how the business is likely to react within particular circumstances.

Those that fall significantly but that are likely to remain solid businesses well into the long-term can often provide fruitful investments.

But be aware, value traps – stocks that are cheap for a good reason – do exist and a lack of preparation and research will catch you out in the end.

Read more at DailyMail.co.uk