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Avoiding Duds Can Do Wonders For Your Investment Portfolio

Everyone loves to talk about their winners when investing, as this represents a source of pride and ego.

What most people won’t do, though, is to admit their mistakes openly and to acknowledge that they have a bunch of losers in their portfolio. No one is infallible, and every investor would have made some mistakes at some point during his or her investing journey.

The concept of portfolio management and construction is to ensure an investor does not lose too much of his capital in duds and lemons while managing to compound his wealth through canny investments in good companies. In this article, I take a look at two aspects relating to the avoidance of duds.

Avoiding Serious Mistakes

A well-diversified portfolio may consist of around 15 to 20 positions, and the investor would count on the majority of these positions to do reasonably well over the long-term, offsetting any losses from the under-performing positions.

The investor thus has to be careful not to make serious errors which result in severe erosion of his capital – such errors would involve positions in which he loses a substantial portion of his capital (>50% loss) or even a total loss (e.g. bankruptcy of the company). If the investment thesis goes awry or the fundamentals start to deteriorate, the investor should consider cutting his losses and reinvesting the monies into a more worthwhile company to avoid more debilitating losses.

Staying Clear Of Dubious Companies

Many people keep a tally of the good companies they have bought over the years, and a smaller number keep tabs on some of the investments which did not turn out so well, to learn from their mistakes.

However, very few investors keep track of investments which they researched on but ultimately avoided due to various reasons – high debt, dubious accounting or poor numbers. I personally keep a running count of all the companies I looked at and discarded, and then revisit them to see if the decision to avoid turned out to be correct. This not only saves the investor from a lot of heartaches but also allows him to test his criteria for robustness. Over time, he would be able to refine and further improve on his investment plan.

Sizing A Risky Position Smaller

If the investor still wishes to invest in companies which display good growth but which have other risky characteristics, he may the size his position smaller so that it does not have an overly negative impact on his portfolio should it blow up. This is in line with what I wrote on position sizing for a portfolio and is an useful method for risk mitigation.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.