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A very large part of investing is psychological: fighting fear, fighting greed, doing nothing when everyone else is transacting, accepting your shortcomings and admitting mistakes, it all comes with the territory of the markets.
Over the years, we’ve developed some psychological ‘mind tricks’ to help investors when they are looking at their portfolios. They work for us, and are largely common-sense suggestions, but when talking to investors we have realized many investors have not heard of these, so it is time to share them with the world. Try these five strategies on your own portfolio.
Play the ‘you have to sell two stocks’ game
We had to do this recently for real to raise funds for a purchase. We needed to sell at least two stocks from our portfolio. We were very happy that it was an extremely hard decision. We liked everything we owned. And that’s the way it should be. Take a look at your own portfolio, and tell yourself two stocks need to go by the end of the week. Pick those that have disappointed you, or don’t meet your investment goals anymore. You don’t have to sell anything, but if you find this exercise easy then perhaps you should sell a few things, and own stocks that you would hate to part with, instead.
Play the ‘buyout’ game
Take a look at all of your current stock holdings. Then, one by one, ask yourself how you would feel if each company was suddenly taken over, at a pretty nice 30 per cent premium. Now, most investors would say they would be happy with a takeover. But we want you to be not happy at all. You want to own stocks with more than 30 per cent upside potential. You want growth stocks, such as Xebec Adsorption (XBC on Venture) that are up 207 per cent in the past year. A 30 per cent premium? Ha! That’s nothing compared to a winning long-term growth stock. If you find yourself thinking 30 per cent is “fine” then maybe it is time to start looking for some stocks with greater potential.
Ask yourself: Would you buy more in a fire sale?
This is essentially the opposite of the above. Look at your portfolio, then ask yourself if you would buy more of the same stocks if each one suddenly fell 30 per cent. The answer should be “of course.” If you find yourself owning some stocks where you wouldn’t want more at a better price, then maybe you are not as committed to that stock as you thought? Now, we don’t usually like averaging down, and if a stock drops suddenly one certainly needs to examine the reason behind any drop. But psychologically speaking, you should like your stocks so much that you would be happy to own more of them. If not, maybe find some other stocks that you like ‘better’.
Are you just hiding from the taxman?
We don’t like paying taxes any more than you do. However, making taxes the prime driver of an investment decision is never the right move. Say you have a stock up 500 per cent or more, such as Aura Minerals (ORA on TSX, up 654 per cent this year). First, congratulations. But second, look at the weighting of the stock in your portfolio. If you bought, say, an initial three-per-cent position, you now have a giant position in one stock relative to the rest of your holdings. Don’t make a portfolio bet on a single company. Don’t hold a stock just because you don’t want to pay taxes. It is fine to hold for other reasons, at a reasonable weighting, but if taxes are the only reason then it is time to bite the bullet and sell some to reduce risk.
Are you holding that one stock because of ‘hope’?
Let’s face it: We’ve all been there. Holding onto a losing company on the slim chance it will recover. In Canada, our data screen shows 142 stocks that are down 60 per cent or more, this year alone. If no other investor likes these companies (as is obvious by their share price decline) then what is it exactly that you like about them? Why are you going to be right, when nearly everyone else doesn’t want the same stocks? Sure, stocks are volatile, and losses are part of the game. But hope is not a strategy. Trim the weeds in your portfolio and sell any losers where hope is your only chance of success.
Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.
Copyright Postmedia Network Inc., 2020