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How To Cleanse Your Portfolio, Properly

Would you believe it?

Japanese appliance maker, Panasonic, has developed a washing machine specifically for the Indian market. It has a special wash-mode that can tackle stubborn curry stains.

It’s not cheap, though. At US$330, it is about a-tenth more expensive than other washing machines. But some might think that it’s well worth the money.

After all, it could be better than throwing away perfectly good clothes, just because of a few unsightly blemishes.

That got me thinking.

Wouldn’t it be great if there was a wash-mode to remove unattractive stains from our portfolios?

Hideous stains

I think you know the ones that I mean. Those are the stocks that stand out like a sore thumb in our portfolios.

They are generally highlighted in red because they, on paper at least, are worth less than we paid for them.

But unlike hideous stains on our clothes, loss-making shares are not necessarily losing shares. They might even be thought of as sublimely beautiful.

For starters, the difference between the current share price and the price that we paid for a stock does not include dividends.

But many shares, especially our Singapore shares, pay generous dividends. So we need to properly account for the payouts to arrive at the total return from our investment.

That can make a big difference to the way we think about shares. It’s even more noticeable, when we hold an investment for years.

Totally good

Consider, for example, a ten-year investment in Singapore’s biggest bank, DBS Group (SGX: D05).

Some might think that the shares have done badly over the last decade. They are down around 11%.

But when dividends are factored in, the returns don’t look half bad.

The total return is nearly 50%, which equates to an annual total return of about 4%. That is better than leaving the money in the bank’s deposit account.

There is something else to think about, too. Shares that fall into the red in our portfolios could actually be a buy rather than a sell.

So don’t be too hasty kicking them into touch.

Average down?

This has got nothing to do with that popular but mistaken notion of averaging down, though it can seem that way superficially.

Every stock has an intrinsic value. There are different ways of calculating that value, which is why the stock market is so fascinating.

If a stock should fall below its intrinsic value, then that could be a good time for us to buy, regardless of whether we own some, already.

If we had already bought some at a higher price, then theoretically we will be averaging down. If we owned some at a lower price, then that would mean that we would be topping up.

Either way, we will be buying more at a price that we consider to be favourable.

Be methodical

From time to time, the value of our shares will fluctuate. But that doesn’t mean the intrinsic values of those shares have changed, necessarily.

So, the key to making money from stocks is not to ever get scared out of them, regardless of whatever might happen.

A good way is to focus on the intrinsic value, which will help us develop a methodical approach that enables us to block out our own distress signals.

Over the coming week and months, the stock market is likely to be buffeted by more reports of Brexit and Frexit, as talk of Britain and France leaving the European Union circulate.

Then there is the no-so-small matter of North Korea and Syria, which could result in a deadly cocktail that could easily unsettle markets.

Stay focussed

But here at the Motley Fool we always stay focussed on the things that matter. That means we focus on the stories behind companies.

We never allow the price of a stock to get confused with the story.

So, if you want to find out how the Stock Advisor team stays focussed, just take a peek here.

A version of this article first appeared in Take Stock Singapore.  Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.