The end of the year is the perfect time to think about your portfolio. But sometimes that can lead to anxiety if there’s a gap between where your portfolio is and where you want it to be.
Instead of trying to fight your way out of discomfort, a better approach is to engage in exercises that can help pave the way to increasing your wealth over time.
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Here are the investment portfolio actions worth taking before the end of the year.
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Investing in the art of putting capital to work in quality companies, identifying risks that could derail an investment thesis, and holding on to winning companies over time – it’s all part of a portfolio assessment. It is paramount that you have an investment thesis for every asset you own. Some may be short while others may be long. But it’s essential to know what a company does, what it’s trying to do, and why you think it’s worth putting your hard-earned money into.
You can also build investment theses for companies that you don’t own but are high on your watchlist so that you can have the conviction to buy them when it makes sense for you to do so.
As an example, here is the essence of my investment thesis Microsoft (NASDAQ: MSFT):
Microsoft is a leading company with exposure to several end markets. It has gone from mediocre revenue growth and weak margins to a high-margin cash cow, thanks in large part to the build-out of Microsoft Cloud and product upgrades to existing software. Microsoft monetizes artificial intelligence (AI) across its product suite, from Microsoft 365 to GitHub, Azure and more.
The company is well diversified in hardware and software. It owns LinkedIn and has a powerful place in gaming with Xbox and Activision Blizzard. Microsoft generates enough additional revenue to pay a growing dividend and buy back more than enough shares to offset the stock-based compensation, increasing earnings per share by reducing the number of shares outstanding and making Microsoft a better value give.
Because Microsoft has more cash, cash equivalents and marketable securities than debt on its balance sheet, it is well positioned to weather an industry-wide downturn and even capture market share or make timely acquisitions. Microsoft’s price-to-earnings (P/E) ratio of 36.1 is above historical levels, putting pressure on the company to deliver excessive growth or face a sell-off. But in the long term, Microsoft has plenty of leverage to grow profits, making it worth holding on to even if the stock price falls in the short term.
Another mistake investors can make is losing track of their portfolio allocation. Technically, a portfolio’s allocation changes when the market is open and there are fluctuations in stock prices. But the bigger picture is to identify when a substantial change is happening in your portfolio.
For example, suppose you have invested 10% of a $10,000 portfolio Nvidia and 10% in it Metaplatforms a year ago. Nvidia is up 218.9% in that period, while Meta is up 91.8%. Let’s assume that the remaining 80% of the portfolio performs in line with the portfolio S&P500 and has increased by 33.2% during that period. Here’s how that hypothetical portfolio would change in just one year.
To cling
Start value
Percentage of portfolio
Earn
New value
New percentage of portfolio
Nvidia
$1,000
10%
218.9%
$3,189
20.2%
Metaplatforms
$1,000
10%
91.8%
$1,918
12.2%
S&P500
$8,000
80%
33.2%
$10,656
67.6%
Nvidia now makes up about 20% of the portfolio instead of 10%. And while the Meta investment almost doubled, the percentage of the portfolio didn’t actually change that much, as this was offset by outsized gains from Nvidia and good gains from the S&P 500.
If you look at how your allocation has evolved and you’re happy with it, you may not need to do anything. But it may also be that you are much more attached to a particular company, theme or sector than you thought. The knee-jerk reaction might be to sell these winners and rebalance with other names. But that strategy can lead to regret if you sell a stock just because it has gone up. It is better to have a clear reason for selling a stock.
The best approach to addressing uneasy allocation is to put new capital to work in other high-conviction areas. For example, if someone feels their portfolio is too concentrated in mega-cap, tech-focused growth companies, they might consider investing in safe dividend stocks, growth companies from other sectors, or a diversified exchange-traded fund (ETF) like the Vanguard Mega Cap Value ETF.
Let’s say you’re in the capital preservation phase of your financial journey and are no longer putting new capital to work in the market on a regular basis. In that case, you may need to take the necessary steps to balance risk and potential reward by investing in companies that are valued based on what they do today, rather than on their potential growth. The following lesson applies to investors in the capital accumulation stage, so if you are in the conservation stage, feel free to skip it.
Setting clear savings goals for 2025 is just as important as updating your watchlist of stocks to buy.
Simple math shows us that it is much better to be a great saver and a mediocre investor than to be a poor saver and an exceptional investor.
For example, let’s say two people start with $20,000 and have a ten-year time horizon. Person A earns an average annual return of 10% per year and also saves €5,000 per year going into the same investment portfolio. At the end of the 10-year period, they end up with a nice sum of $131,561.97.
Person B earns an average annual return of 20%, but contributes no savings. Despite returns comparable to Warren Buffett’s average from 1965 to 2023, after the ten-year period they would end up at $123,834.73 for the same $20,000 originally invested. It’s still very impressive, but if they also saved $5,000 per year, they would end up with over $253,000 at the end of the ten-year period.
Rather than getting caught up in speculating about what the stock market will do in 2025, it’s a much better use of time and energy to review what you can control: your investments and savings habits.
Having a firm handle on these factors will make it much easier to filter out the noise and focus on achieving your financial goals. This can be especially useful when the market is falling and volatility is high.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 939% – a market-shattering outperformance compared to 179% for the S&P 500.*
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*Stock Advisor returns December 2, 2024
Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
3 Portfolio Moves Stock Market Investors Need to Make Before Year’s End was originally published by The Motley Fool
