The problem portfolio With this kind of portfolio, the injury is concentrated in a single area: maybe a single large holding, or a group of holdings in a particular industry, or in a single asset class. The good news: while the “injured” positions certainly need to be dealt with in the months ahead, the rest of the portfolio performed reasonably well, and probably doesn’t really require a lot of rehabilitation. The singed portfolio The opposite of the problem portfolio, this portfolio was well-diversified before the bear market, but has experienced fairly even drops in nearly all holdings, attributable more to broader-based market declines rather than to any specific problem in any one holding. The good news here is that most of the underlying positions don’t have company- or sector-specific issues that need to be addressed − all that’s really required for healing is time and patience, as the market as a whole slowly recovers. The wreaked portfolio In this type of portfolio, multiple speculative positions, volatile “hot sector” bets and highrisk/high-return holdings have caused significant financial damage. Obviously, there’s a lot of work to be done in trimming back and cutting out losing positions, but perhaps the most important change that needs to happen is a shift inmental attitude. Instead of thinking of investing as gambling, the investor needs to consider it as a rational, analytical practice of assessing risk and reward, and putting money to work to achieve long-term goals. The fortress portfolio It’s not really as if this type of portfolio is “damaged” − on the contrary, it’s performed admirably throughout the downturn and protected capital well. But now that the bear market has subsided (or at least, doesn’t seem to be quite so grim as before), this defensive attitude may need to change. It may make sense to shift out of defensive holdings and start investigating more opportunities among beaten-down businesses and asset classes. The paralyzed portfolio An extreme form of the fortress portfolio, the paralyzed portfolio is dominated by cash, low-yielding investments such as GICs, savings accounts and similar investments, more often than not because of an overwhelming desire to avoid market risk at all costs. Now that the bear market has passed, it makes sense to move from these highly defensive positions into a more “neutral” market stance − but the investor remains paralyzed by the painful experience that’s just passed. Much like the fortress portfolio, the main problem here is mental: moving from paralysis to action, while markets begin their slow recovery. The overgrown portfolio What would happen to your garden if you didn’t weed or water it over the summer? In a nutshell, that’s what the overgrown portfolio is like: a messy collection of neglected holdings, some of which are in need of serious pruning, several that have “died” altogether and a few others that have somehowmanaged to survive just fine. Beyond all the work that needs to be done on the portfolio, often the main challenge here is getting out of this “set it and forget it” approach to investing and, instead, developing a well-co-ordinated plan that determines which holdings still belong, and which should be ripped out altogether. If you recognize some of the features of your portfolio in the problems above, don’t be an “ostrich” and stick your head in the financial sand. The following strategies will give you a road map for healing the damage and for getting back on track towards achieving your long-term financial goals. Finance Types of damaged portfolios Damaged portfolios come in all shapes and sizes. And, depending on exactly how yours is damaged (and by how much), there are a variety of strategies and actions which you can take to get it back to “normal.” CSANews | SPRING 2020 | 27
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