How to Manage your Portofolio

How to Manage your Portofolio

Portfolio Structure

It’s important to remember that your objective in the market isn’t just to be right, it’s to make big money when you are. Two portfolio management techniques that may help you achieve that goal are concentrating your purchases and using proper follow-up buys. We discuss these techniques below.

Concentrated Portfolios

When it comes to the stock market, sometimes it’s better to put your eggs in a few baskets and watch those baskets very closely. If you own too many stocks, you’re unlikely to know any of them very well. As a result, if the market turns, you’ll probably react slowly to the changing conditions.
Consider putting a strict limit on the number of stocks in your portfolio. Then enforce this limit by refusing to add a new stock until you’ve sold one you already own. If, for example, you’ve decided to own no more than 10 stocks, sell the least attractive of the 10 before making a new buy. If you’re a growth investor, your least attractive stock is usually the one that’s performed the worst since you bought it.
That being said, some diversification is warranted. For example, it’s best not to put more than 35% to 40% of your portfolio in any single stock. As far as allocation to one industry group or sector, 25% to 30% might be a reasonable limit for a new investor. As you gain more experience, you can go above this limit. But you must be fast on your feet, always executing strict sell disciplines to protect yourself. You can track other leadings stocks in each stock’s industry group by using the Industry Group Related Information Panels within MarketSmith.
It’s a good idea to set up a portfolio in MarketSmith with the names you currently own. For our purposes, we’ll call this list “My Holdings.” Check this My Holdings list daily and pay attention to things like Relative Strength and the price-volume action on the chart. This will key you in to which stocks are showing strength.

Force Feed Your Winners

Of every 10 stocks you buy, only one or two are likely to be truly outstanding performers. Your goal is to allocate the most capital to your best stocks. Say the market has just entered a new rally and you buy five or six stocks. As the rally continues, some of those stocks will show more strength than others. You might consider selling the stocks that are down the most or up the least, and reallocating the resulting capital to your strongest holdings.

Follow-Up Buys

When you buy a new stock, think about not committing your entire position in one decision. Instead, commit little by little as you confirm your stock is showing strength by advancing ahead. Say your full position for a stock would be $10,000. For your first position, you could contribute $5000 at the start and then, if the stock continues to advance, add additional, smaller amounts until you’ve reached your full position.
We call this technique pyramiding or averaging up, because after a larger initial purchase, you make smaller ones as the stock advances. It’s important that you buy fewer shares with your second and third purchases to avoid running up your average cost. Also, avoid buying more than 5% above the pivot point.