I have always advocated the idea of self-managing your portfolio if combined with the assistance of a reputable stock broker. That way, you pay a little and get a lot. Let’s be honest, anyone can push a “buy” or a “sell” button but the real trick to growth is to try avoid the common mistakes many investors make.
The purpose of investment is capital growth. To achieve this, your first mission must be to identify the things that could potentially hamper the growth of your portfolio. Now I am not talking about investment specific risks here so there is no need for anyone to go out and become a market analyst. I am talking about certain behaviour that could pose a risk to the overall performance of your portfolio.
#1. Starting too small
Many firms work off a standard brokerage fee structure and apply a minimum fee if trade sizes are too small. This is where they make a lot of money. Small investors get hammered by fees so make sure you have a meaningful lump sum with which to start a portfolio.
There are investment vehicles for the “small guy” like unit trusts and tax free savings accounts but when it comes to starting your own portfolio, you do need some ammo.
#2. Concentration risk
The key to minimising the overall risk to your portfolio is to spread your cash around. Concentration risk is best described as the risk of loss arising from a large position in a single asset or sector. If for example you only held mining stocks and an event (like the new mining charter last week) causes the whole sector to collapse, your portfolio will replicate the carnage. Diversification across different asset classes is the best way of defending your portfolio against big losses.
#3. Hanging on too long
Get rid of non-performing stocks in a portfolio. You need to monitor your holdings regularly and don’t be afraid to rebalance.
Knowing when to sell is difficult but I can assure you that “hope” does not make a share price go up. It’s important to learn to cut the losers out of your portfolio. Equally important, is to learn when to take profit. There is a saying that goes “nobody ever went broke by taking a profit”. When stocks become over-valued it is time to sell and get back in later. You should have an “exit strategy” for when things go badly as well as for when they go great. Once you’ve taken that profit, reward yourself as a reminder of why you started investing in the first place.
#4. Bad advice
Trust me on this one, by the time you get a hot stock pick around the braai, it’s too late. Don’t trade on those kinds of rumours. The “smart money” has already traded it and most of the time you’ll end up getting hurt.
Always seek professional opinion and advice. My advice is free so if you’ve heard any hot stock picks at last Saturday’s braai or are even considering starting your own personal investment portfolio, I am happy to guide you.
Here’s to trading profits.
Private Client Trader | Unum Capital