When it comes to your portfolio, what matters the most isn’t the opinion of outside observers, it’s how you feel about what you own and the reasons why you own those investments.
Recently, after a speech to a small group of investors, an older woman came up to me with her brokerage statement in hand. She wanted me to take a look and tell her what to keep and what to get rid of right now.
Truthfully, she reminded me of my mother, who was a savvy investor, fully capable of reading balance sheets and running a portfolio.
When I told her the question was impossible to answer, she protested that she wanted my opinions but would make her own decisions. That’s precisely what my mother said about stocks and mutual funds.
When it comes to your portfolio, however, what matters the most isn’t the opinion of outside observers, it’s how you feel about what you own and the reasons why you own those investments.
You may not be expert at evaluating stocks and funds, but you’re more knowledgeable than anyone on you, and you are the X-factor that makes holdings right or wrong for your portfolio during even the toughest market times.
All you need to do is look at the last few months of market action for a microcosm on why that’s true. Volatility returned to the market in November, stocks lost nearly 10 percent of their value in December, and then rebounded to get most of that back in January.
Plenty of people ran the entire gamut of emotions with the market, fearing the worst and wanting to get out as things got ugly, and feeling giddy when they did nothing and watched the value of their holdings roar back.
Wanting to take more control after a run like that is completely natural, but the moves most people should make now involve improving their control over a portfolio, rather than buying or selling specific securities.
The woman at the meeting had given me a long brokerage statement; she had more than two dozen individual stocks and more than a dozen mutual funds. Those holdings ranged in market value from a few hundred dollars to six figures.
I suggested she start re-evaluating her portfolio with a simple question: “Would I buy this again today?”
If you wouldn’t buy something again today, there’s a real question about why you continue to hold it. Yes, taxes are sometimes a concern, but it is better to pay taxes on gains than to hang onto an investment in which you have lost faith.
Beyond evaluating whether you still like the security now, question whether it is worthy of a significant amount of both your assets and your time.
The small-dollar holdings in the woman’s portfolio — and I know because I asked her about them — represented a few stocks purchased decades ago when she had few dollars to invest, a couple of spin offs where something she owned split and left her with a handful of shares of a new entity, and some mutual funds with which she started small before stopping regular investments during tough market times over a decade ago.
In each of those cases, she should be looking at whether it’s worth her time and effort to stick around. If she would buy the investment again today — the first question she answered — she must also decide if she now is willing to invest a substantive amount in the stock.
Traders know that a lot of their profits come from “sizing” trades properly, never putting too much at risk in any one position, but making an investment substantive enough that they feel rewarded by their good moves.
Long-term investors are the same way. Consider that long before Warren Buffett was a legendary investor, he and his Berkshire Hathaway took positions in small companies; today, unless Buffett can invest something in the billions, an investment isn’t worth his time and effort.
The same applies to ordinary individuals.
Stocks purchased decades ago may have represented meaningful money when your portfolio was a few thousand dollars, but now they are bit players in a much larger and more diversified account.
Worse, the woman claimed she had the same mental block that I have as an investor (and that my mother had too), namely that it takes her the same amount of time and brain power to evaluate a security with a few bucks in it as to size up something with many thousands of dollars invested.
In my own portfolio, this has forced me to apply a minimum investment size; if I am not willing to push a security past my minimum holding amount, then I don’t want to own it.
The question you’re asking here is, “Am I willing to hold at least X-thousand dollars in this?”
Implementing that minimum has meant unloading some securities and adding to others, but the moves ultimately strengthened my portfolio, improved my control, allowed me to focus on issues in which I have real conviction and heightened my resolve that what I have properly serves my purposes.
Moreover, that minimum will rise over time, along with the value of the overall portfolio.
Finally, I asked the woman how many investments she needs to feel diversified, but also how many securities she believes she can own while still feeling like she is managing money rather than simply collecting stocks and funds.
This is another question I have asked myself, leading to more pruning and fine-tuning.
It may not be easy to jettison positions, but feeling overwhelmed by what you’ve amassed — the problem I saw in this woman’s eyes — leaves you with a mismanaged portfolio of insecurities.
Once you have enough positions to feel like you aren’t in control, your nerves are sending you a message.
Note that everything in these evaluations is personal, and not about the market.
The decisions are meant to put you in a position to prosper and be confident regardless of the market conditions, to show you where you need an upgrade and where you’re comfortable.
It doesn’t mean you will have a portfolio with “the best investments,” but it may mean you have the best portfolio you can build for yourself.