Every portfolio has its 'problem' holdings - I know the DIY Income Investor portfolio does!
What constitutes a 'problem' - and what to do about it?
What is a 'problem holding'?
For the DIY Income Investor portfolio, a 'problem' holding is one that stops providing enough income - or which threatens to do so. This includes holdings that:
- Have suddenly dropped in value (i.e. bad news in the pipeline)
- Has had its income cut (e.g. sudden dividend cut)
- Has a yield considerably less than cash savings (say, less than 4%)
- Has other structural corporate problems
As someone who invests at the riskier end of the investment spectrum, I should be used to these negative developments, however hard I try to anticipate and avoid them.
What to do?
Many experienced investors will tell you to get out quick at the first sign of trouble. That might well be the most logical and rewarding strategy - but it goes against our in-built bias against taking a loss.
I prefer to be a bit less dispassionate and usually I hold on, hoping for a recovery. This is always easier to justify if the company's business looks sustainable in the longer term and if there is some income coming in (even if it is lower than expected).
This 'wait and see' approach doesn't work all the time - but it does work enough for me to keep doing it. A case in point is Huntsworth (LSE:HNT) the international healthcare communications and public relations group. It ran into headwinds and cut its dividend - that old story. Well, its latest preliminary results are quite upbeat and the share price has 'returned from the dead'.
My capital loss on HNT (I have different chunks from 2013 and 2014) is only around 3% - a bit more on the price and I'll sell (as the yield then will be under 4%).
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.