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

data analyze research
Dividend Stocks

Outlook for BCE Stock in 2025

If BCE successfully turns around, over the next few years, new investors could pocket some nice income and capital gains.

Read more »

cloud computing
Dividend Stocks

Safe Stocks to Buy in Canada for December

Given their solid underlying businesses and healthy growth prospects, these three safe stocks are excellent buys this month.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Top Real Estate Sector Stocks for 2025

Top Canadian real estate stocks: Why beaten-down office REITs could be 2025's hidden real estate gems

Read more »

coins jump into piggy bank
Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks 

High-yielding dividend stocks can give you more passive income now, but high-dividend-growth stocks can give you more passive income later.

Read more »

Canada Day fireworks over two Adirondack chairs on the wooden dock in Ontario, Canada
Dividend Stocks

Brace Yourself: My Wildest Stock Market Predictions for 2025

I predict that the Toronto-Dominion Bank (TSX:TD) will outperform other large banks next year.

Read more »

man shops in a drugstore
Dividend Stocks

3 Reasons to Buy Dollarama Stock Like There’s No Tomorrow

Dollarama stock continues to rise higher and higher, and it doesn't look like it's going to be any different in…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

3 Secrets of TFSA Millionaires

Don't miss out on these secret yet somewhat obvious strategies to making sure you make the most of your TFSA…

Read more »

Investor reading the newspaper
Dividend Stocks

3 Trump Trade Changes and What They Could Mean for Canadian Investors

Trump's preference for fewer banking regulations would benefit Toronto-Dominion Bank (TSX:TD).

Read more »