We’ve all heard the saying: a new year, a new start.
As we head on into 2021, it’s a good time to take a long hard look at your investment portfolio.
No doubt, 2020 has been a watershed year as the human race grappled with one of the worst pandemics in modern memory.
Rather than focusing on the negatives, a better way to look at the situation is to try to see how we can learn from the lessons the crisis has taught us.
In that way, we slowly improve over time as investors as we make better decisions and smaller errors.
The New Year is also a popular time for making resolutions.
And one of the resolutions you can make is to work on improving your investment portfolio so that it performs better in 2021.
Here are three ways you can help your portfolio to achieve its maximum potential.
One of the best things you can do to perform a thorough review of all the companies within your own portfolio.
The pandemic has upended many business models and caused irreversible damage to certain industries, forcing us to rethink our investment theses for some of our investments.
For each loser that you identify, you should consider selling it and recycling the cash into a more promising business.
Note that “loser” here does not automatically refer to a company whose share price has fallen drastically below your purchase price.
Instead, it refers to the prospects of the business and whether it can continue to report strong numbers such as growth in net profit and cash flows.
Admittedly, this sounds like a painful exercise as you will have to lock in some losses.
However, such a practice is part and parcel of maintaining a healthy portfolio.
Just think of it as maintaining a garden.
You need to continually nurture your carefully-grown plants while getting rid of the weeds.
As more weeds are eliminated, your plants grow tall and strong.
And this is the same attitude we should have when it comes to our investment portfolio.
If we allow the losers to languish over years, not only will it drag down our portfolio’s performance, but it also locks up valuable capital that could have been deployed to winners.
The next step is to gear your portfolio for growth as we enter a year of recovery.
Human habits and practices have been permanently altered due to the crisis, resulting in pockets of strong growth in select industries.
Sectors such as electronics, rubber gloves, online payments and financials have performed admirably this year.
Businesses such as iFAST Corporation Ltd (SGX: AIY), Top Glove Corporation Berhad (SGX: BVA), Paypal (NASDAQ: PYPL) and Mercado Libre (NASDAQ: MELI) have witnessed a strong boost to their business this year.
The discerning investor has to identify the winners that are likely to continue growing their market share amid strong tailwinds.
Resilience and adaptability also prized characteristics as they provide you with peace of mind even when a crisis hits, as it inevitably will.
Companies with physical stores, such as Nike (NYSE: NKE), Starbucks (NASDAQ: SBUX) and Chipotle Mexican Grill (NYSE: CMG), were badly hit by the pandemic initially, but have all managed to adapt and post growth as they pivoted towards digital sales.
Finally, the key to enjoying steady growth in your investment portfolio is to continually reinvest your dividends.
Companies such as Singapore Exchange Limited (SGX: S68) and OCBC Ltd (SGX: O39) pay out a consistent dividend through good times and bad.
By taking this dividend and then re-deploying them to promising growth or dividend-paying companies, you are allowing your money to make you even more money.
Some companies have a long history of growing their dividends, such as Coca-Cola (NYSE: KO) and Clorox (NYSE: CLX).
If you reinvest the dividends doled out by such companies, you will multiply the magnitude of dividends you receive after many years, thus contributing positively to your passive income flow.
The above three methods are by no means easy.
You will have to make some tough choices as you rejig your portfolio for better performance.
But as the New Year beckons, you should see this as a way to refresh your portfolio to better prepare it for growth and income.
And the only way to do so is to harden your resolve and make the necessary adjustments.
Your future self will thank you for doing so many years down the road.
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Disclaimer: Royston Yang owns shares in iFAST Corporation Limited, Singapore Exchange Limited, Nike and Starbucks.