Every broker, financial planner, and investment advisor that I know addresses this part of the business differently. As I review the portfolios transferring into our management, in many cases no one focused on the selling part, and this could be the most important reason for a portfolio’s under performance. As often as needed, their formula for selling should be reviewed for each client and overhauled when necessary. We see over and over that the time needed for research to sell is not given the same priority as the amount of time set aside for buying.
It is my opinion finding the right stocks to purchase to build a well-diversified portfolio is one of the most difficult endeavors one can do successfully. I will also add that selling at the right time can produce the same, and in many cases, more benefit for the overall portfolio’s success, although this is an even more difficult challenge. The most important lesson to learn about selling is no one will be right all the time, yet if you remain committed to your system, and if it’s a good one, you can be right more often than not, and this will produce very favorable results.
One of the reasons we continue to advocate a portfolio size of 48-60 stocks, ETFs, and other entities, is so that no one stock can maintain a large enough percentage to impact overall performance. If each holding is approximately 2%, and it suffers a 40% negative price adjustment, it still is less than 1% of the overall portfolio. Occasionally we are asked why we sell so little, while occasionally others believe it’s too often. I can tell you when a portfolio is built, we believe nothing will be sold for at least three years. Everything bought is perceived as undervalued with double digit growth projected for several years. It is the unknowns and the unexpected that triggers the sell. It might be competitive activity, market change, poor performance, or a host of other variables. A client once said to me, you’ll never have to apologize to me for taking a profit. I’ve also learned if we enact the sell because the indicators say we should, it’s comforting to know our research team has a suitable replacement waiting. Sometimes the trading fee might be the best bargain of the year.
