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4 common portfolio mistakes

Morningstar  |  11 Nov 2013Text size  Decrease  Increase  |  

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The following article is part of an ongoing educational series. The previous article can be found here.


If you have used all of the strategies outlined in Morningstar's ongoing educational series, you would have constructed a portfolio of companies from different sectors, many of the share prices would have risen over time, and the dividend cheques would be rolling in.

If you conducted your initial analysis carefully, you should have a clear understanding of why you liked each company in the first place, some of the key opportunities and threats, its potential for producing dividends and capital gains, its management and financials, and so on.

But while much of the early work may be over, you can't simply "set and forget" even the bluest of blue chips. Every so often, it's worth reviewing each stock to make sure the reasons you bought it in the first place are intact.

Your rationale for holding any stock may, of course, change over time as the underlying company itself changes. That's normal, but it's important that your understanding of the company keeps pace with reality.

Holding the right company for the wrong reasons may be rewarding today, but it can easily end in tears!

If you think about it, the decision to hold on to a stock is not so different to the decision to buy it at the current price. After all, tax and other complications aside, you would only hold on to a stock if you thought it would earn you an acceptable return over time.

So, it's almost as important to have a basic rationale for keeping a stock as it is for buying it in the first place.

The easiest way to do this is to keep one eye on each of your stocks - by following them in media reports, through the Huntleys' Your Money Weekly newsletter and so on.

That doesn't mean you can never take a break, just that you should have a rough idea of what's happening in your portfolio. Then, perhaps every six to 12 months depending on the company, the pace of change in the industry and so on, venture in for a closer look.

Using this two-pronged "monitor/investigate" approach will help you to build an intimate understanding of the company in your mind and you will already be across the major issues when you conduct a closer review.

Regular analysis will help you to decide whether you're happy with your current holding, whether to buy more at current levels, or whether to get out and take your gains (or losses).