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Do you have any suggestions regarding transition arrangements from a buy-and-hold approach to an active investing approach?

The detailed question was:

Do you have any suggestions regarding transition arrangements from a buy-and-hold approach to an active investing approach? The starting portfolio is heavily weighted toward the banking sector but has considerable diversification beyond that. What are the best strategies for transforming an unbalanced portfolio into a more appropriately balanced one? Does the fact that many of the existing shares have substantial unrealised capital gains liabilities affect your answer?

The first element of my reply is to make it clear what you are trying to do. Whether you had a coherent, written investment plan before, what you are proposing is to discontinue the explicit or implied plan you were following and adopt a new one. Once you see it this way we can start to work out an approach.

The first thing to do is to make sure you are very clear on what you are going to try to do going forward. You need to think through and write down your investment plan.

The next thing you need to do is to assess each of your current holdings to see whether you should be holing them, and what level of holding is appropriate, under the new plan. If the existing holding is appropriate, then you move on to the ones that are not appropriate.

If your review shows that you should have a larger holding of some of the existing stocks, you need to work out how to do that. You may need to sell something that you should not be holding in order to release the capital.

If your review shows that you are holding too much of a stock or that you should not be holding a stock at all on the new plan, you have now defined the problem.

If you are making a loss on the purchase price of any of these holdings, then it should be straight forward to sell them and buy something indicated by the new plan. Capital losses can only be offset for tax against capital gains, but the losses can be carried forward. It seems to me that the sooner you get out of the wrong stocks and into better ones the better. However, the taxation situation can vary enormously from person to person and you should get advice on this point from a licensed person before acting.

If you are making a profit on any of the stocks you identify as unsuitable for the new plan, then you rightly have to consider the tax situation. This is outside my area of expertise and in any case I am not licensed to advise you on tax issues. You need to talk to a licensed financial planner or tax accountant.

However, one thing I will offer is that if you have substantial profits on an existing holding, it may only be inappropriate for your new plan for reasons of diversification. In this case, one approach you could take is to keep holding it through to the failure point on the new plan and then sell it and adjust your diversification. So long as you appreciate this extra element of risk and watch it closely, this may be the best approach, especially considering taxation issues.

Please note that I am only setting out an approach for you to follow in dealing with your problem. I am not a licensed adviser and nothing I have said should be construed as an opinion on any course of action. You need to define what you want to do and carry it out. I am only suggesting a logical way to go about making these decisions.

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