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Taking an Objective Look at Portfolio Management

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Most people would accept that each of us has our strengths and weaknesses. That said, I have always believed that in order to improve, one must try to strengthen the weaknesses. In the area of portfolio management it’s important to take an objective look at our decision making. In other words, is the process that we follow geared for success or failure? In case this is somewhat vague, let me clarify with an exercise I began this week.

I made a list every mutual fund I have bought or sold this year. The, I graphed each, and placed a mark on the graph to indicate when I bought and when I sold. The results were very interesting. For example, I sold the Fairholme Fund (FAIRX) on June 24th. Since that date, the fund’s price per share dropped approximately $7.00, from $31.22 to just over $24.00. That was a good decision. However, not all decisions panned out. For example, I held onto the Stadion Fund (ETFFX) which continued to fall since around mid-February. In fact, as of the end of November, it was off 13.31% YTD. 

Another critical factor in this process is to look at the amount of exposure our practice has to a particular fund. If we have some funds with poor performance, but they are a very small part of our entire book, then the problem is not as critical. That’s not to say that we should ignore it. To the contrary, we should strive for excellence at all times. However, it is the funds in which we have the largest positions that will have the greatest impact on our clients and hence, our practice. For example, in the case of Stadion, I have a little over 5.0% of my book in it. 

What prompted all of this was a need to understand what was hindering performance. Yes, it’s been a difficult second half of the year, but if you are anything like me, you’re always trying to improve. To gain a better understanding, I downloaded all positions to Excel and ranked them from the highest allocation to the lowest. Next, I graphed the first five on page one, the next five on page two, etc. This allowed me to get a visual of each fund and how it compared to the Dow this year. Clearly, purchases made at midyear had a tougher time as stocks fell in the last half of the year. 

I am still engaged in this process, but what I hope to gain is an understanding of my decision-making process and ways to improve it. 

Have a great week!


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