How do you decide which shares to buy more of?
In my recent article Dealing With An Expanding Portfolio, I confessed that I had stopped hunting for new shares, and was simply looking to average up or down on my existing holdings instead.
That meant I no longer needed a watchlist, because my portfolio is my watchlist. All I had to do was wait until my favourite stocks lost a little juice, then fill 'em up.
Fellow Fool itsallaguess posted a comment asking for a follow-up, saying: "If your portfolio is your watchlist, then how do you go about using it as such, and in what way do you select the next share to 'top-up'?"
It's a good question. And here's the answer.
As I wrote last time, I have 18 stocks, with holdings ranging between around £800 and £3,600. I reckon I'm spread a bit too thin. Even a 10-bagger won't make you rich if you only invest £800. That's why I'm planning to feed and nurture the stocks I already own, rather than looking for fresh mouths to feed. Here are six ways I select the next share to top up.
1. Recent performance
Cheapness is my weakness. I like buying after a stock has fallen, because I feel I'm getting more for my money. That's why I hold Ladbrokes (LSE: LAD).
I bought in January at 153p, after noting that it had fallen from 208p over the previous six months. A big name like Ladbrokes isn't going bust, I reckoned, so I positioned myself for a lucrative rebound. It now trades at, um, 131p.
The danger with buying on weakness is that there may be more bad news to come. Ladbrokes posted a fall in profits for the six months to June, from £130 million to £105 million, with the benefits of the World Cup offset by too many favourites winning races. Dang those favourites! It will take time to turn the business around, so although it's cheap, it could get cheaper, and I'm waiting….
2. Portfolio balance
I will focus my early efforts on the thin little squits in my portfolio, to give them a bit more fat and muscle. I have invested just £950 in Royal Dutch Shell (LSE: RDSB), and it looks in need of some nourishment.
Its share price has barely shifted since I bought it in September last year, but at least I've pocketed a 6.6% yield. After nearly touching 2,000p at the start of May, it now trades at 1,646p, a drop of 17%. With the oil price dipping to $73 a barrel, Shell seems to satisfy both points 1 and 2. Tony Luckett has some other oil stock ideas.
By contrast, I've got enough exposure to Aviva (LSE: AV) for now, as it's my largest holding.
3. Nasty shocks
A company setback can be a good opportunity to top up existing holdings, which is what I thought when I threw good money at BP (LSE: BP) in April and early August. Oops.
I was also considering investing more in Prudential (LSE: PRU) at around the same time. It made a right hash of its recent Asian shopping trip, and the beginning of July seemed like a good point to buy when it dipped below 500p.
I thought its price would recover once investors stopped being irritated with chief executive Tidjane Thiam. Indeed, it has rebounded a little. Sadly, I spent my cash on BP instead. At this early stage, it looks like I backed the wrong horse, but we'll see how things develop.
4. The macro view
It's often better to buy on general market weakness, when good companies are unfairly knocked by bearish sentiment.
As I wrote in Beware the Double Death Cross, I'm looking to buy on future market dips. If the FTSE 100 hits, say, 4800, I'll be looking for old faves that have taken an unfair drubbing.
That might be Aveva Group (LSE: AVV), which has returned 87% from my two shopping trips in May 2009 and March this year, and is now worth £2,400. The problem with this stock is that it hasn't tended to slip back when the rest of the market has fallen. So I may look at alternatives like Prudential, depending on what looks the best value at the time.
5. Dividends
As investment conditions change, so do our priorities. Like many investors, I've learned to appreciate the joys of dividends. I've got just £900 in Royal Bank of Scotland (LSE: RBS), which fulfills points 2 and 3, but the lack of dividend puts me off from topping it up.
GlaxoSmithKline (LSE: GSK) has a 5% yield and nice defensive qualities, and that's why I recently topped up my £1,000 holding with another £500, a move that has paid off so far.
6. Getting even
They say you should keep emotion out of investing, but c'mon, we are not robots. I spend £1,000 on mining company Rio Tinto (LSE: RIO) in mid-May at 3,370p then set a nervy stop-loss that triggered a sale at 3,025p one week later. It then rebounded to 3,500p. Silly me.
Now it trades a bit lower again and if it dips below 3,000p I might buy again, and cheer myself up by claiming it was all part of some grand masterplan.
So there you go, itsallaguess. I hope that answers your question. And even more importantly, I hope my strategy works.
More from Harvey Jones:
> Harvey owns Ladbrokes, Shell, Aviva, BP, Prudential, RBS and GSK.
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