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Don’t accept unnecessary risk

By Michael O’Connor, theislandinvestor.com
I always advocate for long-term investing, but this buy-and-hold narrative can be misinterpreted as 'do absolutely nothing'.
I disagree with this take, and if your financial advisor has made no changes to your portfolio over the last few years, you should probably go shopping for a new one.
We had the most predictable and forecast interest rate hiking cycle over the last 18 months. If your portfolio was left sitting in bonds when negative asymmetric returns were clearly on the table (only downside), then you need to be asking some questions.
There is a difference between patience and incompetence. Unfortunately, over the short term, the two are indistinguishable.
If your financial advisor hasn't made any changes to your portfolio because they believe that 'time in the market' is all that matters, that's perfectly fine. That is an investment approach that has been successful for so many. But why are you paying them to sit on your money when you can just invest that money directly yourself on any online brokerage? If the middle-man isn't adding value, remove them.
Check your exposure
Just because you're a long-term investor doesn't mean you need to blindly reach for returns. Tactically adjusting your portfolio to mitigate against obvious risks on the table is an important part of the investment process.
With that said, growing expectations around a recession should not be seen as a 'sell everything' event. You simply need to reassess where your exposure lies.
Ensure you are invested in companies with;
Strong 'Net Margins': Improving revenue is great, but it needs to make the business more profitable. Far too many companies are spending more than they are making, all in the name of customer acquisition. This 'growth at any cost' tactic was rewarded when money was free, but with credit standards tightening and interest rates jumping higher, the endless growth narrative is about to catch up on many of these 'high growth' names.
High 'Free Cash Flow' Margins: In its simplest terms, free cash flow is just the cash that can be taken from a business without disrupting the operations of the business. Importantly, this number factors in the cost of growth. So, if a business is growing and has a good FCF margin, it should pique your interest.
Stable Return on Invested Capital (ROIC): ROIC is just the profits a business makes on the money invested into it. The premise is pretty straightforward. You want to invest in companies with a history of using their equity to generate more profits. Looking at companies with sky-high ROIC can be compelling, but what you want to see is a consistent history of stable ROIC over time. Ignore the once-off data; always analyse the trend.
You can find all this info on any company by simply typing the company's name into sites like stratosphere.io.
Be selective in the risks you take.
My portfolio
I have moved to underweight equities with a focus on quality and energy.
The remainder of my holdings have been moved into short-term treasuries, with a very small portion in long-term treasuries with zero corporate bond exposure.
I also hold roughly 20% in a short-term tactical portfolio mostly made up of distressed financials, tech and mining, but I would categorise these as bets more than investments and not something I necessarily recommend doing.
If you have any questions, please don't hesitate to reach out.
To get my latest 10 stock recommendations, sign up for my newsletter by scanning the QR code or go to www.theislandinvestor.com.
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