It's far too easy to overtrade our portfolios. A stock chart twitches up or down on news, and we get the urge to pull the trigger and move on. Or we see a new stock we just have to buy, and we sell a perfectly good portfolio holding to do so. When the stock we sold goes up, we get seller's remorse, not to mention excessive portfolio turnover.
Warren Buffett once famously commented that investors in his Berkshire Hathaway
Know your losers
As I mentioned in a previous column, handling inevitable losers well is far more important to long-term portfolio success than picking winning stocks. Whatever portfolio tracker you use, find a way to sort your holdings from the largest loser to the largest gainer. Put the losers on top -- no fair tucking them away on the bottom.
If the proportion of losers in your portfolio exceeds 25%, you need to do some pruning. Everybody hates to admit they made a mistake, but you can't afford to be wrong much more than 25% of the time if you want to beat the markets.
Which losers do you throw out? Not all of them. Value investors make their money by buying what the rest of the market doesn't love, doesn't understand, or both. If you bought a company at $10, and it's now at $8, but the story hasn't changed -- or has even improved -- the red ink in your portfolio is an invitation to buy more at a cheaper price. Like Buffett says, real investors love it when the market goes down; they get to buy cheap shares.
Then there are the good ideas that just didn't work out. Oil and gas exploration companies may hit dry holes and wreck the future revenue projections you had in mind. Tech companies can get swamped by competition if their products become a commodity. Whatever the reason, I don't stick with companies that don't execute well. They might turn around in a quarter or two, but I'll let other investors hold their stock through that ordeal.
Know your losers, and know why you still hold them. If you can't come up with a good reason, think about moving on to something you do understand.
Scan the charts
What I know about technical analysis fits on a couple of Post-it notes. I rarely buy or sell based on chart moves, but I do take the time to review the charts for all of my stocks every few weeks at least. Why? Because you lose your perspective watching day-to-day ups and downs.
If a good stock suddenly slips back 5%, it can hurt like a bee sting. But when you pull up the six-month chart for the stock, you may see that the "drop" is a perfectly normal retrenchment in a long-term upward trend.
It pays to know something about support and resistance levels, and maybe a few indicators (moving average convergence/divergence, MCAD, is my favorite). If your favorite stock is falling through the floor on no news and no apparent change in the fundamentals, you need to find out why the market has taken the chart in the wrong direction. Same goes for stocks that take off in a parabolic up move -- that kind of growth is never sustainable, so look out.
Keep your balance
If your portfolio tracker doesn't provide a way to sort your holdings by sector, make up your own system and do it by hand. You must have a general notion about how your money is distributed over various sectors, or you'll be totally unprepared to react to the inevitable cycles in those sectors.
For example, if you held hot homebuilders in 2005, like Toll Brothers
A remarkable number of investors have no idea which sectors dominate their portfolios. In this case, ignorance is never bliss. It's more like standing in the middle of the highway and simply hoping not to get run over. You also miss out when out-of-favor sectors start to turn around, becoming tomorrow's market leaders.
Benchmark, benchmark, benchmark
The only reason not to invest in index funds is a clear determination to beat those indexes every year. But like sector balance, many investors have little or no idea whether they are outperforming or underperforming the markets.
I set up a simple spreadsheet for my own portfolio and all my clients, in which I plug in the day's index numbers and the closing portfolio balances. I know in an instant how everyone is doing compared to the three major U.S. indexes, for the quarter, the year, and since they opened their accounts.
Why bother? If you have an actively managed portfolio and you're consistently lagging behind the markets -- not just for a month here and there, which is inevitable -- something is wrong. Maybe you're keeping too many losers, maybe your sector balance is wrong, but you won't even know you have a problem until you see the benchmark numbers.
When you aren't busy analyzing your current portfolio, spend your time reading, listening, and learning about the products, companies, and trends that will lead you to your next great portfolio pick. Whether you choose the wide range of Fool newsletters, investing magazines, trade journals, or something totally different, successful investors are always curious. The only thing better than the winners in your portfolio is the hidden jewel you discover that becomes Wall Street's next star.
Spend some time reviewing what you own, and then be ready to add what you should own tomorrow. You'll never get bored with the stock market again.
Berkshire Hathaway is a Motley Fool Inside Value recommendation. Lead analyst Philip Durell is always searching for bargains and the ones he's found are beating the market. To find out how, simply click here for your free 30-day trial.