Sunday, 24 June 2018

Give Your Portfolio A Health Check

Most people go for regular health check-up to ensure that their body functions well to lead a healthy life.

Similarly, retail investors should also conduct health check on their portfolio to ensure tip-top conditions. After all these are our hard-earned money and we should guard it attentively. 

But very often investors are lazy and do not monitor the health of their portfolio regularly.

Here I would share my portfolio review steps to offer you some guidance. I do such review at least half-yearly.

(Wait.. You do not have a portfolio? Or don't know what is a portfolio? Perhaps we should have a chat :) )

1 - Revisit The Reason for Buying That Particular Share
Basically this is about asking yourself some hard questions to assess if the reasons for buying that share, and holding it in your portfolio is still valid. After re-reading the latest two quarterly reports, news on industry trend and outlook, assess if the company still meet your investment criteria, or form an objective opinion if the share should still remain n your portfolio.

2 - Check The Position Size of each Stock
Meaning, what is the percentage that each stock occupies in your portfolio. Too big a percentage leaves you more exposed to any price fluctuation of that stock. Imagine if you have a share that occupies a 30% weightage, a 30% drop in share price will cause your portfolio to shrink by 7.5% which is substantial. 

Personally, I cap exposure to each stock at 15%. Unless I am extremely, highly confident about the stock pick, I would err on the safe side and stick to this limit.

3 - Adequate Diversification Across Sectors
One should maintain fair exposure to a variety of industries. Watch for lop-sided representation of a particular sector as any negative developments can lead to big plunge in portfolio value. Imagine if you were very bullish on the Oil & Gas sector 4 years ago and allocate 80% of your holdings to Keppel, Semb Marine, Ezion, Marco Polo Marine for example, things would not look good now. 

I also seen clients who had 75% of their holdings in 3 local banks. Although the three local banks are blue chip companies, that client is losing sleep now that all 3 have fell significantly in tandem during the past month.

You can learn more about the companies in key SGX sectors here

4 - Maintain a Healthy Level of Cash
Market sentiment may change very quickly. Stock prices may drop big time without warning and many of your companies or potential buys could be trading at attractive price. Having cash on hand would allow you to collect more shares cheaply, or establish new positions at low price that skew the odds of profit in your favour. 

I would not encourage anyone to go 100% into stocks at any time. Always maintain a cash buffer. I personally keep at least 10% of cash in my portfolio.


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