Earlier this spring I went out to my garden to split some of my hostas. For those who are unfamiliar with this plant, it is a popular shade plant that comes in many colours, sizes and different shaped leaves. They grow as a clump of stocks with leaves that drape together to resemble a little bush. Small hostas can be used as a garden border and large ones as a garden feature. Every so often they need to be split, or divided, mainly because each year more leaves grow, they crowd, the center may dry out, and they don’t look as nice in my opinion. When I split hostas, I replant somewhere else in my garden or often give them away.
What does all this gardening talk have to do with investing? Well, splitting the hostas and tending the garden is similar to looking after a portfolio. Every once in a while the weighting of a stock holding in a portfolio becomes too high. The usual threshold where one would start to consider selling off part is 10%. If a single stock has a 10% weighting in a portfolio it’s time to trim some off, just like my hostas. When a single stock position exposes the investor to a high concentration it raises the portfolio’s overall risk. If something damaging were to happen to that company, and thusly the stock price, it could mean financial misfortune to the investor.
For those of you that remember the Nortel and Enron days you will fully understand what I mean. Basically, those stocks collapsed over a very short period of time and many investors lost a lot of wealth.
It is very easy as an investor and, yes, even an advisor, to get emotionally caught up in a stock, yet less so for an advisor who knows their job is to stay logical and analytical. People will hold onto a stock that has on paper made them a lot of money well past when they should. It often surprises me that people tend to think that owning a stock position is all or nothing. I’m here today to tell you it’s not. Often my strategy is to invest a reasonable portion in a stock, and wait for it to grow. If there is no reason to sell it outright then I sell half. This is especially the case if a stock has doubled. Then, take those funds and buy another company’s stock. Don’t feel that you have to sell it all and find something else.
Conversely, this strategy works as well. My children did it when they started to invest in their TFSAs. They didn't start out with thousands of dollars. They would buy two shares of something and, when they had more money to invest, add to that position. Typically, this is referred to as “dollar cost averaging”. It is when you buy more shares because a stock’s price has dropped and you purchase more shares to lower your average per share cost. It also refers to buying a pre-determined amount at regular intervals. In the case of my children, it was more a matter of them not having enough money to buy a lot of shares at once, so they would later add to the same position. There is nothing wrong with buying one share of Amazon, especially when it is about $1,700 USD per share. Owning one share of a stock you like is better than none at all.