5 Tips for Portfolio hygiene for Income Investors

Summary

• Income Investing is a strategy that intends to build a portfolio which offers a regular source of income.
• During these uncertain times, maintaining portfolio hygiene is essential to ensure that your portfolio remains robust.
• While adding a stock in a portfolio, it is crucial to know how the business generates income, the scope of the business, its outlook, and the market in which it operates.
• Ask yourself ‘Why?’ while considering including any stock in your portfolio. Also, focus on cost minimisation strategy.
• Do not hold on to stocks that are not performing well.

Income investing is an investment approach that focusses on creating a portfolio that produces steady income. The main objective of an income investing strategy is to have a regular source of income which could be in the form of dividends, interest payments, or bond yields.

In the first six months of CY 2020, the stocks listed on the ASX were on a roller coaster, and many market players faced hurdles while selecting stocks. The market during this period was highly volatile, making it challenging for investors to build a portfolio.

Even now the market remains uncertain with a rise in the new cases of coronavirus. In such a scenario, one must maintain proper portfolio hygiene which would help in keeping the portfolio healthy.

In this article, we would be providing you with five tips which would help in sanitising the portfolio.

GOOD READ: Time to Sanitise and Build Immunity for your Equity Portfolio

Selection of Stocks:

While there are many stocks listed on the ASX, it is an important task to look for the ones in which you see growth potential and want to invest. Let us look at some of the vital points to consider while shortlisting stocks:

• Stock selection should be done based on the objective of the portfolio. An income investor prefers to stick with what they expect from the portfolio.
• The second point while selecting stock is to stay updated about the stocks included in the portfolio. It could either be via news, media releases, trends in the market etc.
• Based on the goal, an income investor decides which stock they would preserve and which they would sell.

While selecting a stock, one should have an idea about how the business makes money, the market in which it operates, the outlook of the company, scope of the business in the market where it works, and the potential risks.

This can be done by looking at the company’s announcements, investor presentations and company’s prospectus.

Another point which the investors note while selecting the stock is that they stick to those stocks which they know and the industry to which it belongs.

Understand the reason for investing:

After the selection of the stocks is made, an income investor must cross-check whether the stock selected meets the objective of the portfolio. They should try to figure out the reason why they should invest is in any specific stock.

ALSO READ: Investing During Crisis: Tips to Ride Through the Volatile Territory

Cost Minimisation:

Many investors in the market seek investment guidance from the brokers who charge brokerage, fees etc. for the services which they offer. The amount which goes into a broker’s pocket in the form of commission or fees does not compound for the investors. Instead, it is a cost for them.

So, in such a case, the income investors can look for means by which they can reduce the cost in their investment timeline and save a significant amount at the time when the goal of the portfolio is achieved.

An income investor can minimise the cost by taking advantage of the tax-efficient accounts.

Diversification of Portfolio:

Experts in the market say that investors should prefer diversifying their portfolio. By this, it means that the investors should not invest their investment only in a single stock. Instead, they should look for similar stocks. For example: If the income investor is investing in blue-chip stocks providing a steady dividend, the person should not concentrate on investing in single blue-chip stocks. Alternatively, the investor should look for other dividend-paying stocks available in the market with similar features and benefits.

The most significant advantage of diversification is that it can mitigate the risk of the entire portfolio. In case a company is not doing well, then the effect would be minimal as compared to a situation in which the investor would have invested the entire amount in a single stock.

Time to Say Goodbye to the Favourite Stock in the Portfolio:

As investors spend their hard-earned money, it is also essential to look for such stocks in the portfolio which are not doing well and remove them. Some indicators of such stocks are:

• Rapid growth in debt.
• Earnings are not evident.
• The business model is not clear.
• Management ethics are doubtful.
• The market price of the stock has surged at a much faster rate than its underlying EPS, which is not a sustainable situation in the long run.

These are some of the steps which could be followed while sanitising a portfolio. After acquainting oneself with the above-mentioned steps, one should always have a road map which would support in making an investment decision, i.e. it would become a guide where one can figure out the time to buy or sell a specific stock. The advantage of this rule book is that it will provide strength at a time when there is uncertainty in the market. It will prevent investors from making any irrational decisions.