Why set and forget is not an optimal strategy

The set and forget strategy is not an ideal method for investors to maximise their returns in their share portfolio. It is prudent for investors to keep a watchful eye on their portfolio and make changes when appropriate. We discuss reasons why the set and forget strategy is not an optimal strategy for all types of stocks.

Stocks that don’t perform need to be cut

The set and forget strategy fails to identify and cull stocks that have not performed over long periods of time. There are some blue-chip stocks in the Australian market where the share price movement has stagnated for years. Investors may be happy to hold this stock as it may pay a good dividend but there are times when the dividend yield and share price has declined over time for these types of stocks. Holding a stock that has been going sideways for a while locks your capital away when you could be invested in a stock that generates more capital appreciation. Examples of well-known stocks that have lost more value than the dividends received in the past several years include Westpac, Telstra, and AGL.

Cyclical stocks should not be held continuously long term

The set and hold strategy should not be apply to cyclical stocks. These stocks do well when the market is growing and they do poorly when the market is weakening. Examples of such stocks are material stocks and consumer discretionary stocks. When the economy is growing, there is high demand for materials, when the economy starts to weaken this demand declines. The share price of these stocks usually falls when the economy contracts. The same can be said about consumer discretionary stocks, when the economy is in recession, consumers do not have extra disposable income to spend money on non-essential items. These cyclical stocks should be monitored closely and portfolios should be adjusted accordingly when there is an economic downturn.

High beta stocks should be cut when there are heightened risks in the markets

High beta stocks are stocks which move more than the market and hence are riskier. They have a beta reading of more than 1. These types of are very volatile and should not be left to be forgotten in a portfolio. These stocks should also be monitored frequently in a portfolio. High beta stocks do well in a bull market but in a bear market, they can fall heavily. They can generate higher returns than lower beta stocks but need to watched regularly. In a bear market, the more positions you have in the market is more capital you are at risk of losing if the share price continues to plummet.

High growth stocks should be watched carefully

High growth stocks can be riskier and should be watched frequently. These stocks can generate high returns as there is potential for greater growth in the future but these companies may be also be operating at a loss. Stocks in the Buy Now Pay Later sector had rapid share price increases a few years ago but some of these companies have since had significant share price declines and they still have not recovered back to their all-time highs.

In conclusion, the world is always changing. The past few years is a great example of this. Companies rarely perform at their maximum in all market conditions.

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To maximise portfolio returns, it is best to not set and forget, but to adjust holdings over time to suit the changing conditions.

Lauren Hua is a private client adviser at Fairmont Equities.

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