A lesson in portfolio tactics

I’ve established a strategic investment style with which I’ve become very comfortable. Even the recent Market angst hasn’t fazed me.

But the time came to rebalance my portfolio, and I’m here to report that I’ve learned something new about my tactical approach: there’s a right order for trades… and a wrong one.

The position.

Aquarius Platinum (AQP) has more than doubled in price since I added to the position I’d held since before the Crash. But at 450p a share I wasn’t really expecting much more.

What’s more, above average growth in the UK stock portion of the portfolio means it’s too large for my chosen asset allocation.

The strategy.

I prefer to maintain a stake in any company I’ve owned that doesn’t give me a good reason to back out. After significant growth I’ll reduce my holding and use the profits to diversify into new stocks. So the plan was to sell half of my AQP position, hold on to the rest and buy GlaxoSmithKline (GSK).

I’ve been watching them for a while, and in the light of the current return on fixed interest investments, I estimate the dividend makes this stock worth £13–14 per share.

An additional attraction is the relative stability of these large pharmaceutical companies: my portfolio could use a little added stability considering the natural resources companies it contains.

Decision made! I’m going to move some of my money from AQP to GSK; and the remaining cash released from AQP will be redistributed to other asset classes. How hard can that be?

The tactical error.

Quite, as it turned out the Markets chose this week to teach me another lesson.

My first mistake was to get greedy: AQP was off its highs, but still representing a respectable profit, I was reluctant to sell without getting top dollar.

But wait, I’ve already got cash earmarked for incremental investment into other asset classes. I thought I’d be clever and use my spare cash to take up a position in GSK, leaving AQP to return to the highs when I could sell to replenish the cash.

My error was in the order I planned the transaction.

The aftermath.

The market fell steeply after I bought the GSK stock, and the AQP followed.

Strategically there’s nothing wrong with this, I’m in this for the long haul and I’m confident these two will recover.

Tactically I’m trapped with both stocks in my portfolio, which is even more unbalanced than before I started!

If I’d sold AQP first and it’d risen, I’d have lost out on a little profit but secured the GSK position for the dividends as planned. Importantly the portfolio would be balanced.

If AQP had dropped, I’d have secured the profit I already had and could have bought GSK even more cheaply. The portfolio would still have been balanced.

And what about the cash to meet my other investment plans?

As it is I’ve lost the opportunity to take my profit on AQP, bought GSK at a higher price than necessary, thrown my portfolio even further out of balance, and tied up cash that I could be using to buy other assets at a handsome discount.

Once again I’m humbled, and just because I failed to consider the order of my actions. Not a mistake I’ll make again.