The Bi-Annual Portfolio Review

In today’s article, I’m going to cover my bi-annual portfolio review process, undertaken around July and December. It’s a follow on from an article I wrote back in August about the different types of portfolio review I undertake and will likely form part of a series when I eventually get around to writing up the other bits.

Setting up the Portfolio Review

I start by downloading the current valuation of my portfolio into an excel spreadsheet, broken down into individual positions. I sort the positions by size, with the largest at the top, and then use Stockopedia to find the latest Price to Earnings (P/E) valuation.

Using conditional formatting, I assign three ‘grades’ to this column – anything under ten is green, ten to twenty is yellow, and anything over twenty is red. At a glance, this gives me a basic indication of which positions in my portfolio are looking ‘expensive’ relative to others. I then go through each position in more detail, reviewing the company’s performance over the last six months and how I feel they are likely to perform over the next six months.

Add, Hold, Trim or Sell

I assign each position a rating of add, hold, trim or sell. In any given report, I only expect to see a few positions with a sell rating – sometimes, this will be to take profits, but other times because I’ve called the outlook incorrectly and don’t feel as confident in the company’s potential as I did when I originally bought it.

Usually, these sell positions number no more than 2 or 3 at most; over twelve months, I try to keep my portfolio turnover down to less than 15% of the total, reflecting my general approach as a buy and hold investor more than a trader.

Trimming positions is more of an art than a science – in the first instance, I decide whether the position is growing too large relative to the others in the portfolio. I don’t have a precise figure for this – I usually begin considering trimming the position when it reaches around 8-10% of the portfolio, depending on the reason for the change in position sizing.

A position grows (or declines) relative to others for several reasons. In my experience, the most common reasons is relative outperformance. For simplicity’s sake, let us say I hold thirty positions with an equal weighting of 3.3%. Ten of them are growing at 5% per annum, ten of them are growing at 2.5% per annum, five of them are not growing at all and five of them are declining in value.

Over the course of three or four years, the positions with the higher rate of growth would become worth significantly more than 3.3% of the portfolio as 15% would be shrinking in value and another 15% would be flat. Add in dividends and you can easily see how some positions can change in size relative to others.

The risk then becomes that these oversized positions have the potential to create outsized damage should something go wrong with one of the companies. Let us say, for example, that one goes bankrupt. With an equal weighting to each of the 30 companies, my total risk is just 3.3% of the portfolio, but as the position grows, my risk increases with it. At 6% of my portfolio, the bankruptcy could seriously impact my profit for the year. At 10%, my profit would likely turn to a loss. The larger the position gets, the larger risk I am taking.

Of course, this risk is balanced by the likelihood that the company is a high-quality outperformer – exactly the sort of business I want in my portfolio. As such, I don’t mind allowing positions to grow relative to others, but I like to understand why and take steps to actively manage my risk rather than just looking away and ‘hoping for the best’.

Alternatively, the position could be becoming outsized due to relatively underperformance of the rest of the portfolio. Let us again take a theoretical portfolio of 30 positions but this time change the growth rates to reflect declining positions. Ten positions show no growth over six months, ten are losing 10% per annum, five are losing 20% per annum and another five are losing 40% per annum.

In this instance, I would much rather sell the positions losing 40% per annum; attempting to compensate for this kind of decline in 15% of my portfolio would be almost impossible. I would be seriously examining the company and attempting to find out why the share prices were in such precipitous decline.

The Investor and his Neighbour

It’s important to note that investing purely on share price movement isn’t really investing at all – Warren Buffett once shared an anecdote about buying a farm to illustrate this principle.

In his story, he images a fictional investor who buys a farm for a million dollars. Next door to the farm is an alcoholic, manic depressive farmer, who comes to the fence to offer a price to buy our investor’s farm every day at 12 noon. On the first day, the neighbour offers one million, one hundred thousand dollars for the farm and our investor turns down the offer, saying he’s only just bought the farm and wants to enjoy it. The next day, the neighbour returns and offers one million, two hundred thousand dollars, saying it’s a fantastic farm and he really wants to buy it.

Again, our investor declines the offer.

On the third day, the news forecasts a huge drought and the neighbour only offers half a million dollars, saying the farm will be loss-making, and he’s offering our investor a chance to get out at a good price.

Again, our investor declines the offer.

This continues for day after day, year after year, and every time, the investor declines offers ranging from as little as one hundred thousand dollars to ten million, saying he bought the business as an investment and wants to keep it.


I invest by following a similar principle. When I undertake research on a company, it might take me months to decide to buy it and I do so because I feel it has good long-term potential – not because I hope I can sell it to someone else next week for slightly more than I paid for it. By potential, I mean that the company sells a good or a service which I feel is likely to be in high demand, that it does something few others can do, or that it does it cheaper or better than the competition.

The six-month portfolio review I undertake gives me an opportunity to review my holdings but I doesn’t mean that I have to do anything at all. Fine, today, my neighbour might be offering to buy the entire portfolio at a 10% premium to the price I bought it for. Tomorrow, they might be offering 10% less. What interests me is the value of the offer relative to the profit the company is making and what I feel is likely to happen to that profit in the future.

Ideally, I want use the bi-annual portfolio review to identify and add to positions where profits will grow over time  – faster than inflation and faster than the market average – and to avoid and sell out of positions where profits are likely to decline or to be growing less quickly than the market average.

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