How to Review Your Portfolio in a Falling Market: Part 1

A falling market is a reminder for us to review our portfolios. Should we buy Starbucks Corporation (NASDAQ:SBUX) shares and sell Amazon.com, Inc. (NASDAQ:AMZN)? It’s a balancing act that only you as the owner of your portfolio can decide.

In the past week, the S&P 500 has fallen 5.7%, the Dow Jones Industrial Average has fallen 5.2%, and the S&P/TSX Composite Index has fallen 5.2%. In particular, on Friday, in a single day, the first fell 3.2%, the second fell 3.1%, and the last fell 2%.

It surely looks like the sky is falling and more pain is coming. Investors should do at least this one thing as the market falls: review your portfolio.

Review your portfolio

Are you seeing stocks that you’d rather not have in your portfolio? Ones that are more volatile than others and have low-quality ratings? Do you like the allocation of each sector or company?

Divide your portfolio by quality

Ideally, I want to hold the companies I’m most comfortable with. You guessed it; stocks like Royal Bank of Canada (TSX:RY)(NYSE:RY) and Canadian Utilities Limited (TSX:CU). But at other times, I buy certain companies for trade, such as Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK). In a down market, Teck Resources can do considerably much worse than the former two.

So, it’s very important to divide your portfolio between high-quality, long-term holdings, and low-quality or trading holdings. The division helps you prepare mentally for managing your portfolio.

If you’re a long-term investor, you probably want most of your portfolio to be high-quality companies bought at proper prices.

Divide your portfolio by sector and by company

Another way to view your portfolio is to divide it into these sectors: basic materials, communication services, consumer discretionary, consumer staples, energy, financial services, healthcare, industrial, real estate, technology, and utilities.

Keep track of how much money you have allocated each sector. Since companies in the sectors of basic materials and energy generate more unpredictable earnings because their earnings depend on commodity prices, it may be wise to keep a lower portion of your portfolio in those sectors.

It can be alarming if one sector has over 25% allocation. That means 25% of your portfolio is in a single sector. If something bad happened to that sector, a quarter of your portfolio would be at risk. Likewise, you might consider allocating only up to 10% to any single company.

However, how much to allocate to each sector or company is up to each individual’s comfort level and risk tolerance. Some investors concentrate their portfolios and only hold 10 to 15 stocks at a time. Others hold hundreds of stocks.

A sample portfolio

Here’s an example of what a portfolio may look like.

  • Consumer discretionary: Starbucks Corporation (NASDAQ:SBUX), Amazon.com, Inc. (NASDAQ:AMZN), and TJX Companies Inc. (NYSE:TJX)
  • Consumer staples: Alimentation Couche-Tard Inc. (TSX:ATD.B) and PepsiCo, Inc. (NYSE:PEP)
  • Healthcare: Johnson & Johnson (NYSE:JNJ)
  • Industrial: Emerson Electric Co. (NYSE:EMR)
  • Real estate: Canadian REIT (TSX:REF.UN), Boardwalk REIT (TSX:BEI.UN), and Ventas, Inc. (NYSE:VTR)
  • Technology: Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation (NASDAQ:MSFT)
  • Utilities: Fortis Inc. (TSX:FTS) and Canadian Utilities Limited

To start, Starbucks, Amazon, and TJX might make up 15% of the portfolio, 5% each. Alimentation Couche-Tard, Pepsi, and Johnson & Johnson make up 8% each. Emerson makes up 3%. Canadian REIT, Boardwalk REIT, and Ventas make up 8%. Apple and Microsoft make up 7%. Finally, Fortis and Canadian Utilities make up 10%.

If I don’t like the current allocations, I would add to the company or sector that I want more of when I have new money to add to the portfolio. If I think one company has overrun itself, I can sell some of its shares to reallocate to other companies.

Ideally though, I want to buy and hold quality stocks forever, and receive a growing income from them…as long as the companies retain their quality.

In conclusion

Actually, even before a market falls, Foolish investors should review their portfolios periodically, at least every three months. However, falling markets are a reminder that investing is not a set-and-forget thing. The market and the factors that affect it change all the time. They’re dynamic. As a result, we need to be dynamic, too.

There’s more to do in a falling market. Find out what they are in part two of this series.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of CANADIAN UTILITIES LTD., CL.A, NV, PepsiCo, Royal Bank of Canada (USA), Starbucks, and Teck Resources Limited (USA). David Gardner owns shares of Amazon.com and Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Amazon.com, PepsiCo, and Starbucks.

More on Dividend Stocks

Dividend Stocks

The 2 Best Canadian Blue-Chip Stocks to Buy Now

Blue-chip stocks can be some of the best stocks to have in any portfolio. But when they're trending upwards, investors…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »