with NOEL HARTY
Wednesday, January 07, 2015
We have all been told as investors at some point in time that equity investments outperform fixed-income investments over the long term. Whilst this remains true, the recent short-term performance of the stock market makes this old adage hard to believe.
Investors have always found it hard to make investment decisions when they are in equity positions that are on the upside in the short term. At what point do I sell my equity holdings? Do I sell all or do I sell some? If I sell a part of my equity holdings, do I buy more equities? These are all questions that investors ask when faced with equity positions that have gone up above the initial purchase cost.
There is one simple answer to all these questions: Any decision made must be in line with the initial and in some cases the revised portfolio objective.
At the onset, a portfolio allocation would have been determined by the investor. This portfolio allocation would remain in place until there is some change in the investor’s circumstance that requires rebalancing the portfolio. A significant upside in equity positions in the short term can also trigger the need for immediate portfolio rebalancing. This is where a decision has to be made based on the portfolio objective.
At the initial stage of setting up the equity portion of the portfolio or at the point of buying individual stock, the investor will decide whether or not they want to set a price target for that particular stock.
The price target is the point at which, if achieved, the investor would exit the position so that a comfortable return is realised. There is no set method for determining a price target since this is usually based on individual risk tolerance. Price targets are subjective. At any point in time financial analysts will have differing price targets for a particular stock.
Although dividends are not guaranteed, there are stocks that pay dividends consistently and have dividend yields sometimes in excess of bonds with similar rating. Adding dividend stocks to the equity component of a portfolio will ease the pressure of decision-making when there is a short-term upside in the stock.
In this case, the investor could easily sell the stock for the short-term capital gains or hold on to the stock for the continued benefit of the dividend payments. Again, it is critical that these decisions be made with the current portfolio objective in mind.
An investor who wants income over time from the portfolio would more than likely hold on to the stock, whilst an investor with a more aggressive risk tolerance would seek to sell a part or all of the holdings in the particular stock.
Investors can use current trends to dictate which stocks to buy initially, and whether or not in a short-term upside they sell these stocks. For example, companies that continue to display innovation in technology are more likely to survive based on current trends.
What are your thoughts on the future of electric cars? The answer to that question will determine whether an investor holding a stock like Tesla (TSLA) sells in a short-term upside. Investors who believe that there is no future in electric cars would sell if indeed they did find themselves holding the stock, whilst investors who believe that there is some future for this innovation will continue to hold the stock.
There are a number of listed companies that are making a big difference in our way of life. The way we communicate has changed significantly over the last decade with the implementation of social media by companies like Facebook (FB) and LinkedIn Corp (LNKD). So has the way we shop, with the introduction of Amazon (AMZN) and now Alibaba (BABA).
The way we watch television, with the introduction of Netflix (NFLX) has also changed.
Whilst this is not a comprehensive list, there are many investors who held on to these stocks in times of significant short-term upside because they believe that these are companies with solid fundamentals that have made and will continue to make a significant impact in the way we live and do things.
The point cannot be stressed enough that there is no “one size fits all” in setting up an investment portfolio. Investment decisions must be made in line with an investment objective and an assessed tolerance for risk.
– Noel Harty is a branch manager at Stocks & Securities Ltd
View the original article here
Portfolio strategies for equity investments
