How to reboot your share portfolio

Richard Hemming

How much risk you are comfortable with in your portfolio?

It doesn’t matter where you are in the stock market, when the tsunami hits, everything gets carted. This demonstrates that you don’t want to be too loaded up on risk for moments like this, which is one reason Under the Radar has always advocated holding up to 25% or more of cash of the amount that you have allocated to equities.
 
But what do you allocate to equities, which are risk assets? This is personal and depends upon your age, the industry you work in and how effected it is by financial markets/economic growth and your appetite for risk.

Why value will triumph

The Blue Chip Value Portfolio has a value bias because the research shows that value stocks delivers high returns over the long-run (meaning over 5 years plus). Why is this? Because over time growth stocks get over-bid/over-bought and too expensive. People lose perspective and pay too much for a future stream of expected earnings.
 
But the past few years has been challenging for value investors like us, who look for assets that are cheap in a relative sense. These are companies that don’t have over the top growth prospects and trade on lower than average earnings multiples and/or are at a discount to net tangible assets or book value.
 
It has been difficult because growth stocks have been driving the giant US market. The famed FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – have been aggressively bought. This has been replicated by the likes of Afterpay (APT) in Australia’s market. Investors had been gambling that if they paid $30 for Afterpay, someone else would pay $45 the next day.
 
But as we said in our Small Cap report of Afterpay: “While we appear to have been early to start realising gains, the company’s current position validates our decision. This is the lesson: it’s good discipline to take risk off the table for high growth companies that are not profitable and not paying dividends.”
 
And as we’ve also said in the past: “Dividends in our view represent one of the key differences between speculation and investing for the long-term.”

Building a portfolio

Our Blue Chip Value Portfolio is a great place to start and is easily accessible on our website. The weightings of each stock are a good guide about where the portfolio stands in relation to its exposure to industries. These weightings are a result of where we are seeing compelling value, which has been largely in the banks and in the big miners. Another advantage of this system is that it favours the true Blue Chip companies, which investors can easily buy and sell.

Important trading information

The current market volatility will diminish over time, but that greatly depends on when a vaccine is found. We have been buying in small parcels, which is what our advice has consistently been. We also don’t believe in chasing stocks (big and small) because an opportunity should arise for patient investor.
 
We firmly believe that this volatility provides buying opportunities for investors with a 3-5 year return horizon. Don’t expect the market to go up tomorrow and exercise caution.
 

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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