Prune Your Portfolio to Keep it Green
As any gardener will tell you, it’s important to trim dying plant life and remove weeds to keep your garden green and healthy. The same rule applies to your portfolio.
Managing your own portfolio can feel overwhelming and highly complex. But I like to think about financial quagmires in simple terms, and whenever I yank dandelions away from my tomatoes, I think about the time-sensitive or moribund aspects of my portfolio that need to get trimmed back.
In less volatile environments, blue-chip stocks were considered evergreen investments. Many investors and portfolio managers considered these stocks, ones like General Mills (NYSE: GIS), General Electric (NYSE: GE) and AT&T (NYSE: T), the gold standard. They historically delivered consistent earnings growth and stable dividends. These assumptions have been challenged lately.
If you pull up a chart of General Mills, GE or AT&T, you can see these stocks aren’t exactly evergreens these days. In the last two years, General Mills is down 31%, GE down 71% and AT&T down 24%.
While blue-chip stocks may not be the salve for longer horizon portfolios, it doesn’t mean there aren’t financial vehicles to include to help your assets grow steadily over a long period.
Highly rated bonds are usually the most stable investments. A bond promises a fixed interest payment annually, and as long as the company meets its commitment to repay the bond at its due date, you will receive your principal back.
Firms like Moody’s and Standard & Poor’s do a good job at assessing the risk of large companies issuing debt. These firms analyze each company’s cash flow to determine its ability to pay interest coupons and eventually pay off the debt. If a bond is paying an interest rate that looks too good to be true, it’s likely the market is worried about the company’s ability to pay off its debt.
Stocks with a long track record of paying dividends and a healthy stream of profits and cash flow usually have long shelf lives. These stocks don’t need to be growing earnings at a super fast rate. In fact, turbocharged earnings growth typically requires a big spending budget, which can cripple cash flow.
Further down the shelf-life timeline are high growth, more expensive stocks. They rarely pay dividends but offer the prospect of healthy capital appreciation if the stock catapults. Many tech stocks and biotech stocks fall into this category. It’s good to have a few on hand, but you’re best to sell them after a big move.
The last and least shelf-stable financial instrument for your portfolio is options. These instruments literally have an expiration date. If you buy a call option and the stock price is below your strike price on expiration date, that call will expire worthlessly. The mirror image exists for a put option; if the underlying stock is trading higher than your strike price at expiration, your option is worth zero.
Options can add quite a bit of spice to your portfolio. They are incredibly volatile and offer geometric gains if time and price move in your favor. Predicting a stock price one year out is terribly difficult and it’s nearly impossible to do so in a consistent fashion in a shorter time frame.
That doesn’t mean you shouldn’t have any options in your portfolio. Try trading options in small portions. The price of an option can go from fortune to failure in a very short period.
But there are ways to make money that are timeless. My colleague, the legendary investor Jim Fink, has developed a system that pinpoints regular stock trades that make money, regardless of economic cycles or market ups and downs. Like Turtle Beach (NSDQ: HEAR), which spun off a 1,601% gain in less than five months. Regeneron Pharmaceuticals (NSDQ: REGN), which shot up 2,014%. And Canopy Growth (NYSE: CGC), which skyrocketed 2,547% in only two years.
Jim’s system just hit on three companies that could put up to $330,000 in your pocket. Want to know his secrets? Click here now for details.