clean up your portfolio

Second Chance to Clean Up Your Portfolio

Typical Market Bounceback Gives Investors One More Chance to Reallocate

I will repeat what I shared on WHA’s Facebook page and Twitter last week:

The market gives you a chance to see if you were swimming with no trunks on
The market gives you a second chance to see if you were swimming with no trunks on as Warren Buffett often says.

Just Another Dip to Buy?

The funny thing is that many will just assume another small correction on their march to unlimited profits. They won’t pay attention to details such as:

whether their stocks performed more poorly than the market, in such ways as not bouncing back as much or not at all!

They’ll keep their same holdings – even though the Moday dip was past their comfort level and even though their holdings were unusually weak or highly correlated (meaning not well diversified).

Smart portfolio managers – and yes even if you’re running your own 50k portfolio, you are a portfolio manager – are cognisant of their risks. Cognisant at both the individual stock level:

  • Company risk (management, execution, competition, etc)
  • Industry risk (rental DVD’s anyone?)

and the portfolio level. That means

  • too much in the same kind of stock
  • No diversification away from stocks

Your Plan to Reallocate Is…

What are you doing or did you do to adjust to the market character change which has been going on since June?

Since before the summer the market has been flat. We’ve had some strong down days in the market. This is often a clue that large institutions are selling. And we witnessed a struggle for most stocks to make headway. Most of the positive action was in a small group of strong performers which I have come to term the new “Nifty 50” in reference to a similar occurrence in the late 1960s and early 1970s.

a second chance to reallocate as the market struggles. Notice the more frequent "red" or selling days
a second chance to reallocate as the market struggles. Notice the more frequent “red” or selling days. Green days happen on lower volume (little volume bars on bottom of chart = how many shares were traded that day).

High volume down days and market leadership in a narrow group of stocks are often tell tale signs that some kind of top is in place. You never know if it’s a major top or just a correction in a continued uptrend until AFTER. But when you get these slowdowns, it often makes sense to reassess.

For example, if you follow certain teachings, you would have risk management plans in place. Trader, newsletter author and author Stan Weinstein would call these flat times “stage 3” after a market advance and advise traders to go to cash and investors to cut back.

Investors Business Daily founder William O’Neill often advises taking profits on stocks after they move up 20-25% in most cases and has stop loss rules.

Trader and author Peter Brandt teaches limiting risk on each trade so that your system likely puts you in cash as markets weaken (or puts you short).

And even value investors like Warren Buffet, Dan Loeb and Seth Klarman act differently in market tops. They buy special situations that they know well but hold A LOT of cash. Check the cash ratio of value investors’s funds to see where we are in the market cycle. I’m sure you will find MUCH higher levels of cash than you would’ve in 2009.

Your Second Chance

The conclusion – if world class investors change tactics near market tops, why shouldn’t you? What can the little guy do you ask? First off you are getting a second chance after Monday’s drubbing to do SOMETHING. If something needs to be done that is.  You can do anything the big guys do, better with a financial advisorespecially with the knowledge and ease of investing today. You could:

  • keep a bit more cash than you usually do in your portfolio like the value guys
  • keep stop losses like the traders – Brandt, O’Neill and Weinstein
  • Rotate/reallocate to a more conservative portfolio as the fully invested crowd would (and is) do (ing).
  • use options to protect a portfolio as my Twitter friend David Pinsen would advise (@dpinsen &

None of these ideas are recommendations of course. You have to choose your own path. You won’t be happy following mine. And this is true with my clients. I am a financial planner, not a portfolio manager. So I have to encompass my clients’ values and beliefs, along with their goals and emotions, into their portfolio.

Some clients are index investors who want to be fully invested and buy dips, some are safe annuity types, and some believe that we are on the precipice and should be conservative and own some gold.

So each of these people would have their own style. You should have yours. What is yours? And if you can’t answer, it’s time to think about it. talk to your financial planner and get a strategy that matches YOU and works for you. And take the second chance to clean up your portfolio that the market is giving you right now.

featured image courtesy of Siena College on Flickr