This is the second article in our mini-series covering portfolio construction. It is focused on how to manage and maintain a portfolio.

Once a balanced portfolio has been constructed and is up and running, for some investors, there may be a temptation to tinker.

It is therefore worth reiterating what we said at the outset, that investing is a marathon and not a sprint. What is most important is to monitor how your investments are performing relative to expectations.

FEAR AND GREED

One challenge for investors, which can be a distraction, is that stock prices tend to swing around a lot more than underlying company fundamentals such as sales and profit growth. These are the real drivers of long-term market value.

This dilemma was nicely summed up by the so-called father of fundamental investing, Benjamin Graham who coined the phrase ‘in the short term the market is a voting machine but in the long term it is a weighing machine’.

What Graham meant by this is that in the short-term investor’s emotions such as greed and fear tend to drive share prices up and down, but over the long-run rationality takes over with share prices following profits.

The stock market is not there to inform you according to Graham but to be exploited. ‘The intelligent investor is a realist who sells to optimists and buys from pessimists’ said Graham.

This leads us to the first principle of managing a portfolio, which is to focus on news and developments related to the fundamentals which drive business value and ignore the swings in sentiment and short-term price movements.

MANAGING CASH FLOWS

Typically, there are two sources of cash flowing into a portfolio which need to be managed. The first is new money built up from savings, usually monthly or quarterly.

Remember to consider the size of new investments in relation to the costs of dealing. This may mean letting cash build up until it becomes financially viable to invest the new cash. Keeping costs low is an important aspect of successful investing.

Deploying new cash can be very useful when it comes to maintaining balance in a portfolio because it allows an investor to naturally rebalance exposure to different assets and sectors which may have shifted.

The performance of individual investments will inevitably diverge from each other in the short term, which is one of the reasons for diversifying which we discussed in the first article of this series. 

It presents an opportunity to add to laggards in the portfolio. This is a cost-effective way of rebalancing portfolio weightings and allows an investor to take advantage of the natural ups and downs of stock prices.

Dividend income is a second source of cash flow into a portfolio. It is worth reminding readers of the importance of reinvesting dividends.

Dividend income allows an investor to buy more shares which increases dividend income next time, which allows more shares to be purchased and so on, creating a virtuous circle. This is the principle of compounding.

Putting new cash to work and reinvesting dividends are key parts of portfolio maintenance.

Monitoring a portfolio

checklist

• Think about how you fund your account and consider reinvesting dividends
• Checking monthly or quarterly is sufficient for most investors
• Monitor news about companies (and their competitors) and funds you own as well as macroeconomic developments
• Keep track of what’s expected from your holdings before they report earnings

HOW OFTEN SHOULD I CHANGE MY PORTFOLIO?

It is not necessary to keep track of the performance of your portfolio minute by minute or even daily or weekly. Following progress monthly or quarterly is sufficient for most investors.

It is more important to monitor the fundamental news flow from the companies you own, and their competitors, and macroeconomic developments. This helps build knowledge and understanding of the key drivers.

Investment platforms such as AJ Bell and investment software providers such as Stockopedia and Sharepad provide services which allow customers to create watchlists, portfolios, a calendar of future earnings announcements and dividend payments.

The London Stock Exchange (LSEG) is also a good source of news announcements and corporate events.

When it comes to assessing new information contained in earnings results, it is worth remembering that first-half and full-year results only cover a relatively short period of performance.

Legendary investor Warren Buffett says: ‘Do not take yearly results too seriously. Instead, focus on four or five-year averages.’

The direction of travel is more important than specific numbers which only represent a snapshot of the business at a point in time.

Remember stock prices respond more to how a company has performed relative to consensus expectations and the outlook, rather than past numbers. Therefore, it is worth the effort to find out what the forecasts are going into an earnings report.

Larger firms often state what analyst consensus expectations are on RNS (regulated news service) announcements. Paid for services such as Research Tree aggregate research reports and forecasts.

A free service (sign-up required) is available at Marketscreener.com and for US stocks Koyfin provides an investor service covering news, forecasts, and data.

Unless performance is wildly different from what was expected, it is often wise to take Buffett’s advice and do nothing. Investments are a long-term endeavour.

DISCLAIMER: AJ Bell owns Shares magazine. The author (Martin Gamble) and editor (Ian Conway) of this article own shares in AJ Bell.

WE WANT TO HEAR FROM YOU

We are looking for individuals or couples to share their experiences of managing their own investment portfolios.

If you would like to take part, we want to know why you chose certain stocks, funds or bonds, why you might have subsequently sold some of them, and what you hope to achieve from investing.

We will pay £50 in John Lewis vouchers as a thank you to anyone whose story is published in the digital magazine.

Drop us a line with your name and two lines describing your investment experience. For those picked to feature in the magazine, we’ll be in touch to get the full story.

CONTACT: shareseditorial@ajbell.co.uk with the words My Portfolio in the subject line.

DISCLAIMER: Shares/AJ Bell does not provide advice or personal recommendations. The My Portfolio articles are for information only. You must do own research and consider your own personal circumstances before making investment decisions.

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