THE PORTFOLIO UPGRADE

A portfolio comprises of two types or categories of stocks; namely the “buy candidates” and the “hold candidates”.

A buy candidate is an attractive stock worth having in the portfolio. On the other hand, a hold candidate is a stock which in not attractive enough to be a buy candidate, but not unattractive enough to justify the transaction cost of selling it. Thus, a portfolio would comprise of stocks, which are buy candidates (i.e. very attractive) and hold candidates (mildly attractive).

Active asset allocation and its process force an investor to improve the quality of his portfolio within asset classes. Consider the following:

Let’s say an asset allocation decision requires a shift from bonds or cash into stocks. Then the investor most likely would buy the more attractive stocks or the buy candidates. On the other hand, if an asset allocation decision requires a shift out of stocks. Then the investor is more likely to sell the lesser attractive stocks or the hold candidates. And would continue to hold the buy candidates in his portfolio.

In either situation, there is an ongoing process of upgrading the portfolio, with attractive stocks or the buy candidates comprising it. The same process is true for the other asset classes, as the aim here is to increase returns or improve performance of the portfolio.

Here again, I must caution you that the above process of portfolio up-gradation does not guarantee that the portfolio would out perform the market.