If there is one thing that investors should have learned in the sharemarket slump that accompanied the GFC, it’s that set-and-forget is not a viable investment strategy. A share portfolio that is not being regularly reviewed is not going to do its job – of creating wealth – properly.

Clearly there are many different ways of using the sharemarket. An active trader, for example, might review the portfolio and clean out non-performers weekly – even daily. A buy-and-hold investor shouldn’t have the same sense of urgency, but private client advisers say the principle is the same.

“People need to keep an eye on the way their stocks are performing,” says Angus Bligh, head of private clients at Wilson HTM. “These days, that means reviewing the portfolio pretty regularly. If a stock isn’t doing its job, you’ve got to be prepared to ask whether it is worth its place.”

Bligh says the buy-and-hold strategy for the long term – the kind of strategy popularised in the publishing mini-industry that produces books on Warren Buffett’s investment theories – fails to take into account that often, companies change.

“Ten years ago, if you printed off the ASX Top 20, and then printed it off today, it would be vastly different. You would have had AMP in there, Telstra, Brambles, Qantas, all under-performers. If you bought the Top 20 as a portfolio ten years ago and still held it today, I suspect you would potentially have done quite poorly. You’ve got to be prepared to get out of under-performers.”

Danny Stent, director of stockbroking firm DJ Carmichael, says that at a minimum, a proper long-term portfolio should be reviewed once a year. “It depends on the client – some people are happy with that. But if you’ve got a decent adviser, you would probably be looking at it more frequently. It doesn’t necessarily mean selling anything: maybe the stocks there are all still valid, and you want to hold on to them, but you’ve got to be re-assessing their investment merits, at least every few months. Each stock has got to be earning its keep: if one is down, you’ve got to reassess whether its long-term prospects are still sound.”

In some cases, he says, clients are prepared to “average down” in a stock that has fallen: to buy more, to lower their average entry price. “Some people want to do that, some have a golden rule that says ‘no way in the world.’ Frankly, I think it’s almost 50:50 – sometimes it’s a bad thing to do, because the stock keeps going down, but just as often, you’ll buy more of something, lower your average entry price and it will go back up – especially if you’re prepared to give the stock time. But I think since 2007, people have seen that there are stocks – like some of the property trusts – that are not going to recover.”

Stent says some buy-and-hold clients will set “virtual stop-losses”, such that if a stock falls by a certain amount, they will get out. “Other clients will just do it far more on an investment basis: they think ‘markets move up, markets move down, it doesn’t necessarily mean the investment decision has changed.’ Of course, having that view doesn’t mean that a stock won’t go down further!”

Bligh says that clients – and advisers – can “fall in love” with stocks, and hold them too long. “Everyone know they shouldn’t do this, but people aren’t always ruthless enough – or diligent enough – to say ‘I bought this at $2, it’s now $1.50, why am I still holding it?’ Quite often you save yourself a lot of pain by clearing out the under-performers, but it takes a lot of discipline.”

Jamie Nemtsas, partner at financial and business advisory firm Lachlan Partners, gets around this by using index funds to put in place overweight and underweight positions around clients’ core equity holdings. “For example, in March 2009, when markets were incredibly cheap, we weren’t talking clients into buying the direct shares we like, we were telling them to load up on an index fund. They were far more willing to buy into the market in that way than to buy more of their favourite stocks, because they were shell-shocked.”

In the same way, because “there’s no emotion attached to an index fund”, he uses them to go underweight. “Clients are often attached to their shares and don’t want to sell their CBA or BHP: they have an emotional attachment to them because they’ve added so much value. So if we want to underweight their equities exposure, it’s easy to sell an index fund, because there’s no emotional attachment to an index fund,” says Nemtsas.

Often the adviser will lessen the pain of a ‘sell’ call by having a ready replacement – making the move a ‘switch’ rather than a straight sell. “You don’t have to do it that way, but sometimes it helps,’ says Bligh. “In fact, in a falling market like we had for much of 2007 and 2008, a sell call with no switch was generally the way to go, but generally speaking, the reason you sell a lot of shares is that you’ve got something better for the clients to invest in.

“If I rang someone today and said ‘sell Brambles, because they’re having another strategic review, and I want you to go and buy Wesfarmers’ – generally you clean out a stock because there’s something better for you to go into; or if there’s not, and you’re fearing the overall sector or the overall market, then you’d boost your cash. That’s what we did last year and the year before: sell, but not necessarily put it straight back into the market, because of the risk of more downside to come.

“That’s the beauty of direct shares, you can do that, you don’t have to be fully invested. The bigger stocks are very liquid, so you’ve got the ability to pull the trigger and sit on the sidelines,” says Bligh.

Tax can be an important consideration in the decision to sell. Advisers say that when selling a share and incurring capital gains tax, investors should be looking to use a capital loss to offset – or at least minimise – that taxable gain.

“Tax should never be the sole driver of the decision to sell a stock, but losses can be handy to bring down the tax liability,” says Bligh. “The important thing is for people in high tax brackets to assess whether you’ve held the shares for 12 months, to make sure you get your gain down as much as possible.

“The classic was Telstra a few years ago: people all had gains on it, and didn’t want to sell, but the company went pear-shaped and those same people are now sitting on losses. But at the end of the day, you shouldn’t hold on to a company just because you’ve got a capital gain on it, to avoid the tax on the gain – if the company’s circumstances have changed, and its outlook going forward is poor, you should get out of it,” he says.  

Allan Furlong, manager of private client services at Joseph Palmer & Sons, says selling a stock does not have to be a case of a poor performer. “We’ve got a model portfolio and that’s ultimately what we want to get clients into. I think the smarter brokers are going that way, because you’re trying to access that self-managed super fund (SMSF) part of the market. In that model portfolio, say the client starts out with a 4 per cent weighting in BHP, and BHP goes for a good run, such that the weighting in that stock gets up to 7 per cent, we’ll say ‘that’s probably too much in BHP, let’s get it back down to 4 per cent.’ So we might sell it down to that level. We did that recently with Wesfarmers.”

It’s not selling out of a stock, he says, more of a “tweak” of a position. “We’ll see more of that kind of activity from private client brokers in future,” says Furlong.

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