Portfolio Tune-Up: Five Tips
With baseball season underway, the weather warming up and over a third of the year now history, it is time to give your portfolio a good tune-up.
Heading into 2008, I discussed how you can
for the new year. As a follow-up to that lesson, here are five things you can do
right now
to be better prepared to outperform
throughout the rest of the year.
1. Get the Red Out
Like spring allergies that can make your eyes all red and teary, your portfolio might be chock-full of stocks which are losing money ("in the red"). So take a hard look at any losing positions and put in the effort to understand why those stocks are down.
If the
remain strong, then perhaps you want to stay pat or add to that position. Maybe you just made a tactical mistake as to the timing of your buy, but your investment thesis or strategy is still sound. If that's the case, then stick with the investment. If you bought the (losing) stock for a short-term trade and ended up owning it as a long-term investment, then consider selling it
now
.
Should you determine that the fundamental factors that led to your investment have deteriorated, then it is time to let go. Recently, I purged my portfolio of the
CME Group
(CME) - Get Report
. I owned it for nearly nine months and did not sell it at the right time. I now believe that it was priced too high and the market will no longer pay a premium for its growth.
Finally, if you identify a long term loser that you are waiting to "come back," such as (in my opinion)
Pfizer
(PFE) - Get Report
or
Six Flags
(SIX) - Get Report
, then overcome the emotional attachment you have developed over the years and divorce it from your portfolio.
2. Look for the Bull Markets
Even with the current relatively flat market, plenty of stocks have sharply advanced. It just goes to prove to you that a bull market always exists, even in poor economic or investment climates. The challenge is to now look ahead six to twelve months and determine the stocks or sectors that are likely to advance.
At the same time, identify which ones are more likely to perform poorly.
We know how well the
have performed. Perhaps that will continue and you should move more of your portfolio to that sector.
However, the price of energy is a big concern for the markets. As oli continues to soar, many people believe that natural gas will become the next bull market in energy. Alternative energy is still in its infancy and the next bull market could be in solar or wind.
Housing has been in the dumps for many quarters. Perhaps it will turn the corner and begin a new growth cycle. The same can be hypothesized for the financial sector.
I spend plenty of time and energy looking for the next bull markets and suggest that you do the same.
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) - Get Report
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
")
5. Remember This: There Is a Presidential Election Coming
Sure it is entertaining to watch as Hillary Clinton and Barak Obama sling barbs at each other. Perhaps you enjoy David Letterman make fun of John McCain's age on the
Late Show
. However, this is no laughing matter. The stock market, individual stock sectors, the economy and job markets will all be impacted by this election.
Now
may be the time to be prepared to buy the stocks that will benefit from the election of one of those candidates or sell the stocks that will be hurt by a candidate's election victory. Jeffrey Miller, a colleague and
RealMoney
contributor has designed a Website called
. The site is devoted to helping sort through the economic platforms of each candidate and aid in the development of an investment strategy.
For example, if you think (as I do) that a Democratic victory will put pressure on
Wal-Mart
(WMT) - Get Report
to break itself up or unionize its workers, then selling or shorting Wal-Mart, if Clinton or Obama win, would be one investment strategy. However, if you believe that a McCain victory would further bolster defense spending, then perhaps an investment in a defense contractor within the
PowerShares Aerospace & Defense ETF
(PPA) - Get Report
would be your strategic move.
Homework Time
Spring is a time of renewal, so look under the hood of your portfolio to make sure that it's firing on as many cylinders as possible. Seek to jettison stocks that no longer make sense and add new ones which will help to nurture your portfolio and grow you returns for the rest of the year.
At the time of publication, Rothbort was long AAPL and BWLD, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
. Scott appreciates your feedback;
to send him an email.