Managing a portfolio of shares and gardening

John Kingham writes that unless you’re a buy-and-forget investor, managing a portfolio of shares is an ongoing activity. In fact, for most people, it should be a lot like gardening. For example, you’ll probably want to: Choose strong, healthy companies; “Plant” a diverse range of companies so the portfolio can thrive under a range of economic weathers; “Plant” a diverse range of companies so the portfolio isn’t overly affected by any one economic “disease”; Give them time to grow; Give them a regular health-check; Trim them back if they grow too big; Remove them if they’re no longer attractive or healthy. So just like a garden, a portfolio of shares is a dynamic entity which changes through the economic seasons. And just like a garden, a portfolio of shares needs regular care and attention if it is to reach its potential.

Check the health of the overall portfolio: Gardeners check the individual plants in their garden, but it’s also a good idea to check to the health of the overall garden. And by health, Kingham means that the garden is not only healthy today, but that it is likely to be healthy long into the future, regardless of what nature throws at it.

For an investment portfolio this means building in a layer of protection against these major risks:

• Company risk: The risk that a company you’re invested in goes bust, or suffers a significant and long-lasting decline in its ability to generate revenues, profits, and dividends

• Valuation risk: The risk that a company you’re invested in suffers a significant and possibly long-lasting share price decline

• Sector risk: The risk that a sector you’re invested in suffers a significant and long-lasting decline

Buy or sell one company to help keep the portfolio in shape Going back to the gardening analogy, gardens need to be trimmed and weeded to keep them healthy and a portfolio of shares is no different. There are three main reasons for selling: 

1. Weeding (selling an unhealthy company): A company becomes unattractive because of its growth, profitability, debts or something else has become significantly worse than when you invested in it.

2. Removing (selling a healthy company where the share price has grown too fast): A company has performed well, but that success has made the shares popular and expensive.

3. Pruning (selling half of a healthy company to reduce its position size): A company has performed well and the share price has increased to the point where the holding is too big, but the company and share price is still attractive.

When it comes to portfolio management, a little goes a long way: In summary, portfolio management is a lot like gardening. Share portfolios require a small amount of work on a regular basis to keep them healthy, attractive, growing and robust. None of this takes very long, apart from analysing new investments which you would probably be doing anyway. And for Kingham, the time spent keeping up to date with each holding, as well as the portfolio’s overall diversity and performance, is just another form of sensible investing.