I will stop tip gathering.
"I read as much financial news as I can handle and understand, and tend to follow recommendations of leading commentators that I trust," a reader recently told us, and I'm sure many of you take a similar approach. In fact, searching for company and fund 'buy' tips is one of the most enjoyable parts of investing. The problem is that if you act too often on the tips that you find, you could end up with a portfolio full of clutter - 50 or more holdings.
This means you are in danger of succumbing to 'closet trackeritis'. The downside of so much diversification is that your portfolio soon resembles a tracker fund. But you may be paying much higher fees than a tracker fund.
Research shows that even professional fund managers typically have only half a dozen good ideas. So don't be what one of our experts termed a 'classic random investment acquirer'. Instead, think of yourself as a portfolio manager and slim down on the number of investment ideas you are running.
I will ditch holdings that are worth less than 2 to 3 per cent of my portfolio.
If no stock accounts for more than 5 per cent of your portfolio, then a decent stock pick - one that beats the market by 20 per cent - will add only 1 per cent to your portfolio. But I see lots of portfolios of £300,000 or more than have a string of holdings around the £2,000 mark. Think about selling these small holdings in order to buy more of your higher conviction holdings. Following fewer holdings will free up time to enable you to focus more on the overall asset allocation and risk profile of your portfolio.
I will use a core and satellite structure.
Seriously, this is the easiest way to approach investing, given the two resolutions that you have already made. Get a low-cost core holding for your portfolio - made up from cheap tracker funds, exchange traded funds or low-cost investment trusts. Then pick a handful of your best investment ideas to go around it.
One of the most interesting (and slimmest) core and satellite portfolios we have seen was that of a 60-year-old investor who had just over £200k and was combining nine meaningful stock picks alongside a core holding in tracker funds. He was investing regularly every month into the tracker funds, making sure he bought on the dips.
I will clearly define how much loss I can afford to suffer.
"How much loss can I bear?" is a really important question that all investors should be asking. For example, if your portfolio suffers a market fall in the couple of years after retiring, it may never recover. That's fine if you have guaranteed income from elsewhere, but if you don't it would be a disaster.
I will diversify my portfolio as much as possible across asset classes.
This might seem like stating the obvious. But it is surprising how many investors get this wrong.
You might have a portfolio skewed to a couple of holdings. Watch out for this and always question the need for holdings that account for more than 10 per cent of the portfolio.
You might have duplication across holdings - check your funds' top holdings to make sure that there is no overlap. Check that you don't have two funds with the same manager.
The most common mistake we see is having too much bias to UK stocks. Make sure you have overseas equity exposure too, and fixed income, and property. Oh, and perhaps some commodities and emerging markets, too. But please don't forget the US, which often doesn't feature at all in some investors' portfolios. It's only the world's biggest economy. Add in an exchange-traded fund that tracks the S&P 500 index of US leading stocks and your portfolio will start looking much healthier.
