Virtual Detox of Your Portfolio
Posted on 11. Feb, 2012 by TheFreeInvestor in General, Portfolio
Though we would like to think that most of the time we are objective and rational investors, behavioral finance has shown that our brain is not so simple. If left unchecked, our conscious and subconscious biases derail us from rational investment analysis. One such illusion or bias is our tendency to anchor on the price we paid for a stock. While analyzing the stocks in our portfolio, if we own the stock, the price we paid for the stocks is a factor that impacts our analysis of the value of the stock. For example, if we are losing money on a stock, we want to wait for the stock to rebound so that we can avoid realizing the loss. In reality, the stock price is dependent on the future of the company and not dependent on what price we paid to buy the stock.
So, here is an exercise I do at least once or twice every year — assume that you sold all your investments and you are 100% in cash. Now, one by one review the list of stocks that you had in your portfolio. What is the investment thesis? Is the original investment thesis still intact? If the original investment thesis has changed, did it change for better or worse? Will you buy at this current price with a reasonable expected return on your investment in coming years?
The idea of the exercise is to make sure that you are holding the stocks because of the conviction in those companies, their business models and future prospects, and not because of inertia, anchoring, or biases from our past actions. I just completed such exercise with the stocks in my portfolio and I am comfortable that my portfolio is well positioned to meet my long term investment objectives.
So, go ahead… do a virtual detox of your porftfolio in this first quarter of 2012 ! It is good for the health of your portfolio 
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