The FTSE 100 is up by around 20% from the lows seen during March’s stock market crash. But the strong gains we saw from April until July have flattened out. Risks in the real-world economy seem to be growing too.
Brexit and a possible Covid second wave are dominating headlines. And recent research based on government data suggests that the UK could face nearly half a million job losses or more this autumn. This could lead to a deeper and longer recession.
I don’t know if we’ll see a second stock market crash this year. But I’m using these calm market conditions to make three changes I hope will improve the performance of my portfolio — whatever happens next.
#1: Stocks I’m selling
I share Warren Buffett’s view that the ideal holding period for a share is forever. But just like Mr Buffett, I do sell stocks sometimes if I decide the business is unlikely to ever deliver the returns I’d hoped for.
This doesn’t mean I’m ditching every company that is having a bad time in 2020. I’m not.
What I am doing is taking a fresh, critical look at the companies in my portfolio. I’m looking for companies without any sustainable competitive advantages. Businesses that may struggle to move forwards in weak economic conditions.
Some of the characteristics I’m looking for are low profit margins, poor cash generation and limited growth potential. I’m also very wary about turnaround situations, unless the shares are very cheap and the firms have minimal debt.
#2: What I’m buying
I’m not sure if the stock market will crash again — I don’t think UK stocks look all that expensive, as a whole.
What I think is more likely is that the market will grind sideways for a period. Within this, I’d expect to see some winners and losers. Right now, there are only two types of share I’m buying.
Quality: Shares in many good quality businesses are still trading at lower levels than before the stock market crash. I’m increasing my exposure to companies that generate high returns, plenty of cash and have good long-term growth potential. My recent buys include GlaxoSmithKline and Moneysupermarket.com Group.
Cyclical bargains: I’m also buying shares in cyclical businesses I think are trading at depressed valuations. For example, I believe ITV is a bargain buy at current levels. I’m also attracted to packaging groups DS Smith and Mondi. And I’ve topped up my holding in Royal Dutch Shell.
#3: The lesson I learned from the first stock market crash
As a general rule, my portfolio is fully invested at all times. As a long-term investor I’m not concerned about small share price movements. I’m more interested in locking in attractive dividends and benefiting from longer-term growth.
However, when the stock market crashed in March I didn’t have much cash available to go shopping. That was frustrating, as there were some incredible bargains on offer for a few weeks, before prices started to recover.
I’m trying to discipline myself to keep enough cash in my portfolio to make one or two purchases, if a special opportunity arises. It’s tough, as I’d like to invest more now. But it feels good to be prepared.
