Investing is as much about making sound decisions when buying assets as it is about knowing when to sell. At the core of successful portfolio management lies the principle of diversification and the allocation of capital to investments across asset classes and within those classes. As assets grow at different rates, it's critical to manage your portfolio proactively to adjust the exposures to sectors and investments.
Asset allocation is a critical part of portfolio management. A well-diversified portfolio will include a mix of growth-oriented assets such as property and stocks and defensive assets like fixed interest bonds, hybrid securities, term deposits, and cash. Then there is diversification within each of the asset classes. Most of our long-term client portfolios will hold 15-20 Australian stocks and a similar number of international stocks. This broad exposure helps to mitigate risk while optimising potential returns.
If a portfolio is set up to have 70% exposure to growth assets and 30% to defensive assets as the growth assets increase over time the growth defensive split will skew high. Left unchecked you end up with the growth assets being a much higher percentage of the portfolio. It's critical to adjust these weightings periodically to ensure that you don't inadvertently end up with a greater exposure to higher risk assets than you intended to or than is prudent. This also applies to the levels of exposure to each asset class and the specific investments within asset classes, such as when an individual stock grows to become a larger part of the portfolio than is prudent.
A common conversation I have with clients, especially now as stocks have performed so strongly, is around the timing and rationale of selling to take profits and rebalance the portfolio and then identifying entry points for new investments. If a stock's price has increased significantly faster than its profits, it might be an opportunity to lock in profit, reduce your exposure to the stock and reallocate funds to undervalued investments. The market can often overreact, pushing prices beyond reasonable levels. Selling gradually, or "averaging out," helps manage this risk and ensures gains are locked in while leaving room for further upside as you keep the bulk of the holding.
A good example of this currently is the Commonwealth Bank of Australia (CBA). Over the past year, its share price climbed from $105 to $160, even as its profits fell slightly. There is a disconnect between the share price increase and CBA’s profit growth. Many investors now have an overweight position in CBA and the banking sector. I think it’s prudent to take some profit as the price rises well beyond the stocks fair value. In many cases we’ve sold small amounts for clients at $150 a share and again at $160. This approach retains the bulk of the holding while strategically reducing exposure to an overvalued asset. If the CBA share price goes higher in the short term, I am happy to continue selling incrementally knowing that we’ve prudently derisked and reinvested in better value assets elsewhere.
Once profits are realised, the next step is reinvesting. This could mean allocating to another asset class, depending on the portfolio's overall balance, or investing in undervalued companies. Opportunities often lie in overlooked or neglected stocks trading below their fair value. While buying into such companies can be challenging, it’s essential to remain focused on their underlying value rather than current market sentiment. Both buying and selling should follow a measured approach. Investing incrementally allows you to spread risk, especially when markets are high and corrections are more likely. Similarly, gradually selling ensures you benefit from further gains while locking in profits. This disciplined strategy prevents overreactions to short-term market movements, both up and down, and aligns with a fundamental long-term investment philosophy.
Managing a portfolio is a dynamic process that requires balancing opportunities with prudence. Whether it's reallocating capital from overvalued stocks or identifying undervalued opportunities, the goal is always the same: to manage money in the most efficient and effective way possible. By staying disciplined—buying low and selling high—you can navigate the complexities of the market while maintaining a robust and resilient portfolio.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.