Since beginning we have proudly and openly accepted that we are long term investors. This is what has worked and this is what we stick to.We aren’t bothered too much about daily fluctuations and news driven price movements.
But does it mean that we don’t change our long term portfolio ever?
The answer is No.
Long term investing doesn’t mean Buy-&-Forget kind of investing.
Many experts glamorize the strategy of buy and hold or buy and forget. According to them, if you hold onto your investments for reasonably long periods of time, then you will earn good returns.
That is true, but not completely. You need to hold onto your ‘good’ investments and not the bad ones. As Warren Buffett once remarked:
"Time is the friend of the wonderful company, the enemy of the mediocre."
If you hold on to fundamentally strong and well run businesses for long, they will create enormous wealth for you and give multibagger returns. But if you hold on to mediocre (or weak) businesses, your returns will suffer.
Here is a simple example comparing two stocks - one delivering average returns of 15% while others delivering a returns of 5% for 20 years.
As can be clearly seen, the wealth created by being in Stock A is enormously more than what would have been achieved in Stock B.
What this once again highlights is that long term investing doesn’t mean holding on to ‘all the original investments’. If an investment is not performing as required or the fundamentals got changed, there is no point holding it forever.
And that brings us to the question in the title:
How frequently you should churn your long term portfolio?
Our 5 in 5 portfolio is built carefully with the aim of meeting our 5x criteria in 5 years time. We build the long term personalized portfolio in such a way that it can deliver 4-5 times returns in 5 years time frame.
But not all businesses or stocks perform as we hope for. So it’s necessary to move out when the expectations are not being met. It’s possible that the fundamentals of the stock in our recommended portfolio have deteriorated. Or the earnings or the business itself has lost the initial momentum. If that’s the case, then chances of stock doing well in future are reduced.
We only wish to remain invested in our best and strongest ideas. So for such underperforming stocks, we would ask you to exit. And since we continuously scan markets for fundamentally strong businesses that meet out 5x criteria, we replace the exited stock with a new stock that has the potential to create significant wealth in the long term.
So being long term investors, we hold on to the good stocks and allow them to continue their multibagger journey. As for the ones that don’t fit into our 5x or business strength criteria, we initiate replacement with better ideas.
There is absolutely no doubt that equity has and will again beat all other asset classes in long term.
But to really create wealth by investing in equities, you need to be invested in the right ever-appreciating portfolio of fundamentally strong stocks. And achievement of this largely depends on proper stock selection, continuous monitoring and knowledge of correct entry-exit levels.
And this is exactly what we do for our client as competent stock advisors.
We continuously monitor the business fundamentals of the stocks held in our portfolio and also, keep exploring other ideas worth investing. Our processes and solid investment experience helps in achieving the best outcomes for you. And this means holding on to good ideas and churning the portfolio when necessary to replace the bad ones.