Top traders thrive through eye for detail
With the market surging and the new tax year well upon us, it's a good time to bring your pruning shears in from the garden and set to work tidying up your portfolio.
Selling stocks is one of the toughest areas of investing. People throw around scores of sayings about when to sell. But if you followed most, or even a few, of them, you'd soon get yourself tied up in knots.
Means to an end So what should you do? The trick is to remember that success in the sharemarket comes from holding undervalued investments and that buying and selling are just a means to that end. On that basis, you'll buy a stock if: it is within your "circle of competence"; the transaction makes your overall portfolio more undervalued; and it maintains an acceptable portfolio balance.
You'll notice that the second condition is relative. Its answer depends on your assessment of the value of your potential purchase and the value in your existing portfolio - or, more particularly, of the stock you'd sell to provide the funds to make the purchase. You should sell a stock if: it is no longer within your circle of competence; or the transaction makes your overall portfolio more undervalued; or it restores an acceptable portfolio balance.
Opportunities are thin on the ground As the sharemarket becomes more expensive and opportunities become scarcer, cash becomes an increasingly attractive option and your portfolio balance will be improved by holding some.
That's the case at the moment. The market has chased many income stocks up to prices that allow little or no margin of safety.
Limit your banks The banking sector may satisfy all three conditions for sale. Not even the chief executive understands every risk - and don't be fooled by the strength of their brands: these are risky businesses.
The main problem most people encounter is overconfidence in their assessments of value, with the result that they make changes to their portfolio too frequently and leak much of their returns in trading costs.
It's rather like shifting lanes in steady traffic - it feels as though you're doing some good, but you're probably just burning through more fuel. Generally speaking, you're best to get into a decent-looking lane and stay put.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is the research director at Intelligent Investor Share Advisor.