IS IT TIME TO THIN YOUR HOLDINGS?

When I was 15, I spent a summer living at my cousin’s house working for a local farmer. Farm work is hard but the task that was particularly difficult for me, on an emotional level, was when he sent us out to thin the peach trees. We climbed ladders up into the trees loaded with beautiful young peaches and were given the assignment to pick and toss to the ground 50-75% of them. I was a city kid and couldn’t make any sense of the request to throw away perfectly good fruit. The farmer insisted however, that the trees couldn’t support all the peaches, so thinning was necessary in order to produce a healthy crop.
 
In my logical 15-year-old mind the math just didn’t add up, so I would pick a few peaches and move on, only to have the farmer send me back to my prior trees to thin them again, and again. It wasn’t until the end of the summer when we harvested the large and delicious peaches that I came to appreciate and embrace the value of thinning the trees.
 
The concept of thinning applies to our investments as well. Over time a portfolio can get bogged down with too many different assets. We pick up various positions along the way that start to add up and pretty soon it is difficult to keep track of them all. Although diversification can be good, it is also true that you should not hold more assets than you are able to properly manage. It’s better to own 10 good companies you can keep track of than 100 that you can’t. There is a Wall Street saying that anyone can buy a stock, but it takes a genius to be able to sell one. In other words, we tend to accumulate more than we can manage because we get emotionally attached to our positions and have a difficult time parting with them.
 
Last year was profitable for many investors as the initial virus scare drove the markets down and opened up buying opportunities. This resulted in investors winding up with more positions than they would normally hold. As new companies and more opportunities emerged from the crisis it seemed that a case of FOMO, (fear of missing out) began driving some investor decisions.
 
The new year may be a good time to take a lesson from the farmers. Just because there are countless potential investments out there, doesn’t mean we should own them all. From time to time, it is useful to thin down your portfolio to a manageable number just as a farmer thins a peach tree. Getting rid of investments that have made you money, or that you have held a long time may not be easy, but sometimes it is necessary so that you can give your best attention to the ones you keep. On a tree bursting with young peaches, less is often better, and so it is in investing as well. A strong harvest requires a good thinning now and then.