Many investment websites and blogs tell you about which stocks to buy or sell.
However, not many talk about a more underrated skill – that of managing your investment portfolio.
While knowing which stocks to buy or sell is important, knowing how to manage these positions is arguably an even more important skill.
Making the wrong moves, accumulating too much of a stock, or letting your portfolio languish are all cardinal sins you can avoid.
If you want to know how to generate better returns, here are four tips on how you can better manage your investment portfolio.
Manage your portfolio like a garden
I’d like to think of my investment portfolio as being akin to a garden.
You plant the seeds of financial success, water them and give them time to grow into mature investments.
And as these companies mature, they will bear fruit in the form of dividends, which provide you with a useful source of passive income.
But just like any garden, there are bound to be weeds (i.e. bad investments).
These weeds threaten to choke off your good investments and drag down your overall performance.
Hence, you should be pulling out these weeds while watering your flowers.
All too often, investors end up selling their winners and retaining their losers within the portfolio, which is exactly the opposite of what you should be doing.
By regularly pruning your portfolio of underperforming stocks, you will improve its overall quality and end up with a portfolio of strong companies that can provide steady capital appreciation and dividend income.
Position-sizing matters
How you size a stock position matters within your portfolio.
Ideally, the stock should take up a position that is commensurate with its risk-reward profile.
In other words, riskier stocks should occupy a smaller weight within the portfolio, while stable ones should take up a larger weight.
This may sound counterintuitive as some investors may wish to maximise their profits by taking on large positions in riskier, fast-growing stocks.
However, you should emphasise risk control above everything else.
The odds of a major blowup increase exponentially when you pile too much into a risky business without solid fundamentals.
Conversely, it’s relatively safe to put more money in a tried-and-tested blue-chip stock such as DBS Group (SGX: D05), which boasts a long track record of performance.
Sometimes, positions can become larger by way of share price growth.
When this happens, it is a happy problem to have, as you can decide if you wish to rebalance the portfolio to reduce the weight of this larger position.
That said, if the business continues to do well, and you are comfortable owning a large position in the stock, you can continue to ride the rally to earn outsized profits.
What’s important is that you understand the implications of a larger-than-average position and the risks that come along with it.
Ensure adequate diversification
Diversification is an important aspect of investing, and its purpose is not just for risk reduction.
The need to diversify is important as it allows you to spread your risk over different industries and geographies and not be overly reliant on any sector or stock.
Even if an unexpected blowup occurred, being diversified means that you can withstand the hit without suffering a large loss to your overall portfolio.
Diversification is also important for another crucial reason, and that is to gain exposure to nascent industries that could show significant future potential.
By including companies dealing with cutting-edge technology, artificial intelligence, and data centres, you can get a front row seat to these developments and enjoy the uplift that comes when the industry grows.
Always keep cash handy
Many investors eagerly invest all their money into the market, and then get disappointed when a crash happens.
This is because they do not have cash at such critical moments to take advantage of attractive opportunities.
Hence, it is important to always keep some cash handy as an opportunity fund.
This cash should be liquid and parked in accounts which you can readily access.
You can build this cash up through savings, bonuses, as well as dividends.
The importance of having an opportunity fund cannot be overstated, as crashes do occur suddenly and unexpectedly from time to time.
Having cash to scoop up shares when they are plunging allows you to average down on existing positions or start new positions at bargain basement valuations.
Of course, you also need to have the fortitude and courage to purchase shares when share prices are collapsing around you, but that’s an article for another day.
Hopefully, these tips above can help you to more effectively manage your portfolio.
Once you can do so, you will start to enjoy better and more consistent returns.
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Disclosure: Royston owns shares of DBS Group.
