Spring time conjures up the thoughts of cutting back hedges, weeding out gardens, cleaning out garages/storage sheds, and vacuuming under furniture that hasn’t been shifted in over a year. If Spring time is so associated with house and garden maintenance, then why don’t we consider spring cleaning our Investment portfolio as well?
With the stock market retracing over recent weeks, there’s no better time than now. And recent stock market activity provides some interesting potential for the year ahead. So are you ready to Spring Clean your stock portfolio?
Don’t buy into the Doom and Gloom!
Although there are plenty of “Doom and Gloom” commentators driving the fear of Armageddon and lost wealth, the Australian economy is continuing to grow, and is expected to remain on that path. We may be experiencing slower growth than previous years, but not every year can be exceptional growth. If it were, we would have high Inflation to deal with, and unless Interest Rates were lifted, we would experience an explosion in cost of living, resulting in a similar environment to Argentina or Zimbabwe (as extreme examples).
No, the Australian economy has maintained a fairly steady annual GDP (Growth Domestic Product) growth rate over the last 20 years. As noted in the Australian Trade Commission “Why Australia” Benchmark Report dated June 2014, our economy is in its 23rd consecutive year of annual economic growth. It also suggests our average real GDP growth from 2013 to 2019 is expected to exceed all other major advanced economies.
Buy Buy Buy!
We were provided with a little bit of a scare recently when the Unemployment rate touched 6.4% in July. The World Economic Outlook Report, published by the International Monetary Fund (IMF), reported in April that 2014 GDP growth should be at 3.3%, meeting the long-term average. This is improving from the lows of 2.3% set in late 2013.
Over the last week, we have seen the Australian dollar sliding from around $0.92 to $0.90, and now potentially in a short-term cycle of retracement. This helps boost value in exports, assisting the economy.
At time of writing, the ASX200 index had retraced from just below 5,675 to just above 5,400 – that’s 275 points lower, or 4.8%. In days gone by, a 5% correction in the markets would be deemed a ‘crash’, but modern volatility depicts this as a normal fluctuation. And from a technical perspective, the index is now trading down near its medium term lows. If this short-term sentimental sell-off is deemed to be overdone, then this would be a good accumulation level for long-term investors looking to add to their portfolios.
3 Tips to spring clean your Portfolio
So if you are looking to Spring Clean your investment portfolio, then here are 3 tips on how you can approach the task of deciding what to do.
1) Cutting the dead branches
All too often investors will buy stock for the long-term and if it does not perform as expected, for whatever reason, they hold the position indefinitely. The mentality of “I’ll hold it until it gets back to what I paid” is a process of avoiding a loss. And is a very dangerous method. It requires time for recovery (which in many cases can be years), or it can mean a 100% loss if that company slides so far that it delists or becomes bankrupt (remember Worldcom or OneTel?).
What investors don’t consider, other than the unrealized loss, is the lost opportunity by having capital tied up in a stock that has very little prospect of performing. It is an emotional attachment to something that has lost them money, and that fear of failure resulting in holding a stock that they ‘hope’ will recover.
Consider cutting the dead wood from your portfolio, and you may have the opportunity for it to flourish and grow at a better rate of return. Of course, you should seek advice from licensed professionals (don’t ask your neighbours or family for financial advice in stocks – unless they are Warren Buffet). You may have to consider tax and other issues if you sell long-term investment positions.
2) Planting new seeds
Most investors in Australia will sit in one of two camps: 1) Invest long-term in Blue Chips, or 2) punt small on Speculative stocks. But what alternatives are there?
Firstly, we are a global market now, and it can in fact be cheaper to trade from Australia on an international market (in some instances). For example; you can trade stocks in the US at cheaper online rates than a phone service for Australian stocks. I should know. I’m a US client advisor here in Australia!
If you have ever wanted to participate in industry such as Technology (Apple computers, Google), then you would need to trade on the US markets. But high priced stocks such as Apple Inc. (NASDAQ: AAPL) (approx $100 per share), or Google (NASDAQ: GOOG) (approx $580 per share) scare many investors away.
There are alternatives.
Stocks are one means of investing. You could consider Options, Contracts for Difference, or buying an Exchange Traded Fund (ETF). Each of these is easily traded once you have set up the type of account that allows you to trade them. They are available for Mums and Dads, but be advised, all have their own Risks. Hence, we recommend you speak to a licensed advisor (hint; I am licensed to provide information about these products), to discuss how to manage these types of products. Reason being, if it goes against you, that is your view was wrong, holding these indefinitely in the ‘hope’ they might come back might not be an appropriate strategy.
3) Boosting your existing stocks
Finally, just like adding fertilizers to your garden and watering regularly to help boost their growing cycle, there are different methods you can adopt for your investment portfolio as well. Not all of these are suitable for everyone. So again, take the time to learn what is available to you and the pros and cons, by seeking the advice of a licensed person.
Some stock investors consider opening a Leveraged account. This allows the client to purchase more shares than they have the capital available. Think of it as a loan. Of course you will have fees to pay and interest. And be aware that leverage is a double edged sword; if your stock holdings decline in value you could lose more than your original investment capital. But there are methods in managing (rather than buy and forget), that will help when the markets are not performing accordingly.
Using Exchange Traded Options (ETO’s) against your stock. There are strategies that we use regularly that involve using stocks and options. The view of the strategy may not be for a capital gain in the stock, but to attempt benefitting from different factors in the market such as Time, Volatility, or even falling stock prices. This is an exciting field to consider, as most Mum and Dad investors are completely unaware that these strategies exist, and it’s all above board. They are operated through the Stock Exchange!
For shorter-term activity, some traders will use Futures contracts, Options, or Contracts For Difference (CFD’s). These are also leveraged instruments. The key to using these types of instruments, and in fact for simply investing in stocks, is Money Management. If you have a sound management plan, diversification and execute it accordingly, you should be able to implement any strategy approach with confidence.
So don’t let your investment portfolio go through another ‘season’ without careful consideration. The Buy and Hold approach to investing might be ‘fair enough’, but with what you have in your portfolio help you achieve your financial goals?
It’s well worth the time to evaluate and consider alternatives. A little bit of pruning or repositioning might just help you flourish for the year ahead.
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