Portfolio Tune-Up: Five Tips

3. Do Some Pruning

If you have a garden, then you know that pruning your roses or other shrubs is a necessary task to help develop strong and beautiful flowers. The same can be said for your portfolio. We have a saying in the investment business: "Cut your losers and let your winners run."

I covered cutting loses earlier in this article. Now how about those winners? Letting your winners continue to grow is an excellent idea. However, there comes a point at which those winners become unmanageable from a risk management perspective.

Let me explain.

Say that you purchased Apple AAPL for around $60 to $70 several years ago. Great! At the time, you might have allocated 3% or 4% of your portfolio to that stock. Now with Apple around $180 to $185 that stock is now taking up 10% or more of your portfolio. Every move in Apple now has a greater impact on your portfolio's overall performance.

This cuts both ways.

When Apple sank in the first quarter of this year it might have hurt your performance. Conversely, as it began to rise once again your returns were well rewarded.

The volatility in portfolio return is exacerbated with an oversized position. Thus, a stock like this is a candidate for pruning. The extent to which you do so is up to you, but I have two suggestions. One method is to just cut the position in half. That is clean and easy to do. I recently did that with a new position in Buffalo Wild Wings BWLD, which I bought at around $24.50 and cut in half when it was around $33. Another method is to take out your cost basis . Say you paid $1,000 for a stock several years ago. Now that stock is valued at $2,500. Sell $1,000 of the stock and let your profits ride.

4. Remember This: Earnings Are Not Static

By now each and every one of the companies in your portfolio has reported at least one, if not two, quarters of results since the year began. Ask yourself these questions:

Did I read the company's quarterly earnings report and/or listen to the quarterly conference call?

Have I updated my earnings estimates and price targets?

Has the company undergone a dramatic change, such as new product introduction, senior management change or legal proceeding (civil or criminal)?

If the answer to either of the first two questions is no or the answer to the last one is yes, then you have been asleep at the switch. Wake up and catch up on your homework (see "Four Tips for Understanding Earnings Reports")