What is the best way to undertake a stock portfolio review?

Stock portfolio review

To deal with a fragmented portfolio, you need to perform a stock portfolio review as if all your holdings were in one big account.

 

Today, many households and even some individuals have five or 10 separate investment accounts. These accounts may include RRSPs (regular and spousal), TFSAs and other registered accounts, personal and joint accounts, corporate accounts, LIRAs from past employment, children’s accounts, trust accounts and so on.

In addition, some investors have one or more of what you might call “legacy” accounts. These are accounts with brokers you no longer do business with, but you never quite get around to transferring.


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This fragmented-portfolio situation is more common than you’d guess. Many investors undertake a stock portfolio review by adding up the total value of their accounts from time to time, to calculate their net worth. Most also look for performance discrepancies among accounts. But all too many take little more than an occasional glance at the relative weight of the various securities they own. They have little if any idea of how much impact each holding has on the portfolio as a whole.

You generally have to keep your various accounts separate for tax and other purposes. But when making portfolio decisions, it pays to look at your holdings the way we look at our clients’ portfolios here at Successful Investor Wealth Management Inc. Here’s a simplified way that you can do it.

Start by listing all your holdings on a single electronic file (or piece of paper), and converting their value to Canadian funds. Then separate them by type of security. In particular, you’ll want to group your stocks (plus equity-type holdings like REITs) in one section, and your bonds and other fixed-return investments, like GICs, in the other.

A thorough stock portfolio review goes a lot deeper, of course. But the balance between stocks and bonds—call it equity and debt if you prefer—is a key indicator. That’s because bonds give you higher stability than stocks in the long term, but at a cost of lower returns than stocks.

Next, determine the economic sector of each of your stock holdings. (You can do this by referring to past issues of our newsletters. Every time we update our analysis on a stock we cover, we provide you with its economic sector and other crucial indicators.)

Then, you need to do some arithmetic.

First, add up the value of each of your stocks, regardless of which account you hold it in. That will give you a value for your total portfolio. You then figure out what percentage weight each of your stocks represents in your total portfolio. You may find this figure ranges from a low of less than 1%, to a high of 10% or more.

Here are two rules for the portfolio exposure of individual stocks:

If a single stock represents, say, 10% or more of your portfolio, it exposes you to a higher degree of risk. You need to take a close look at it and make sure you are willing to accept that degree of risk from a single stock holding.

On the other hand, if a stock makes up less than 1.0% of your portfolio, you need to recognize that it is taking up just as much of your time as the stock that makes up 5% to 10% of your portfolio. But even if it’s a winner, you’ll generally make much less profit from it than you can make with a stock that makes up 5% or more of your portfolio.

So you need to decide if holding a stock that can make such a small impact on your finances is worth hanging on to.

If you don’t want to buy more of the stock, you may be better off selling it.

Then you add up the value of the stocks you hold in each of the five main economic sectors—Manufacturing & Industry, Resources & Commodities, Consumer Goods & Services, Finance, and Utilities. You can then calculate how much representation your stocks give you in each of these sectors. This too is crucial.

The Manufacturing and Resources sectors generally expose investors to above-average risk. Stocks in the Utilities sector generally expose you to below-average risk; so do stocks in the Canadian segment of the Finance sector, particularly the top five Canadian banks. (The U.S. finance sector is substantially more volatile and risky than its Canadian counterpart.) The Consumer sector falls somewhere in the middle.

By weighing the balance among the five sectors, you can form an idea of the degree of overall risk in your portfolio.

Make sure your holdings are mainly higher-quality stocks that we currently recommend as buys or holds.

We apply our stock portfolio review technique much more deeply for our clients, of course. But if you apply just this much of it to your portfolio, it will put you far out ahead of most investors in understanding how much risk your portfolio exposes you to, and how close it comes to matching your needs.

Have you ever performed a stock portfolio review? Did you find it a daunting process? Share your experience with us in the comments.

Comments

  • Philippe

    With a combination of tech skills and discipline, I manage to track the total value of my portfolio and the relative value of stocks it’s holding. I do not have the expertise to perform thourough portfolio reviews but I do regularly reflect on the subject and try to apply the best advice I have found.

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