Portfolio Management

This page explains how to optimize returns (balance risk with reward) with a diversified investment portfolio (a basket of stocks).

To reduce risk, lower volatility and improve returns you should:

1. Diversify your holdings across industries and countries.

2. Allocate and maintain stocks in appropriate proportions.

Portfolio management comprises a number of principles and techniques. The method(s) you choose will depend upon your own objectives, priorities and abilities in investing and/or trading. The techniques listed below are ranked from most conservative to most aggressive. I do not recommend Day Trading, Short-Term Trading or Strict Buy and Hold.

Initially, allocate 50% to 70% of your portfolio to the current Strong Buys and Standard Buys listed on the Stock Picks page. This is a reasonable initial allocation whether you use Strict Buy and Hold, Buy - Sell Half - Hold Half, Minimum Turnover, or Sell at Target Price. You may want to spread your initial purchases over 6 months to a year.

To see 2 examples of these principles and techniques put into practice, please go to Model Portfolios.

Principles and Techniques

Strict Buy and Hold
Buy the Strong Buys and Standard Buys. Then put new savings into the new recommendations as they are added to the website. Hold all of the stocks.

Buy - Sell Half  - Hold Half
Buy (Strong Buys and Standard Buys). Sell half of your holdings in each stock when it doubles (usually in 3 to 5 years). Use funds raised from these sales to purchase new recommendations as they are added to the website. Hold the remaining stocks.

Minimum Turnover
Buy (Strong Buys and Standard Buys). Sell stocks when they reach their previous all-time highs or a price/sales ratio of 3. You should also selectively sell stocks in which negative developments add to risk or stocks which have limited upside. Invest the proceeds from these sales into the new Stock Picks. Hold the remaining stocks. 

Sell at Target Price
Buy (Strong Buys and Standard Buys). Sell stocks when they reach their target prices. Invest the proceeds in new picks. Additionally, stocks can be reduced when, through price increases, they cross the demarcation lines between ratings. 

Short-Term Trading
If you want to trade on short-term trends, you should select and trade stocks that have good value characteristics. That way, if a stock drops unexpectedly, you can eventually recover its value by holding it for a longer term. But I believe that the market is too fickle to consistently make money at this strategy.

Day Trading
This is the same kind of strategy as Short-Term Trading, but stocks are bought and sold the same day. As with Short-Term Trading, you should trade stocks that have good value characteristics. Again, I believe that this strategy does not consistently make money.

Additional Considerations

When you establish your portfolio, you may also consider buying the Weak Buys for additional diversification.

Spreading your purchases out will tend to reduce market risk, similar to dollar-cost averaging with mutual funds.

More stocks in your portfolio will tend to reduce volatility. But having too many stocks that have hit their target prices or exceeded their previous highs will tend to diminish returns. It also means more time spent monitoring your holdings.

You should have an appropriate number of stocks in your portfolio. Having too few stocks will increase risk and volatility. Having too many will tend to diminish returns as it is difficult to find a lot of true bargains in the market at a given time. You should have no fewer than 10 stocks and no more than 30. Fifteen to twenty is appropriate for many individual investors.

Consider reducing stocks when, through price increases, they cross the demarcation lines between ratings. This will generate additional cash for new purchases. On the downside, it means extra work, possible tax consequences and higher commission costs.

Always have a percentage of your portfolio in cash. From 5% to 15% is a reasonable allocation. If, however, you accumulate more than 15% in cash (from a lot of stocks hitting their target prices) it's better to stay in cash than buy stock in poor companies or buy shares that are expensive.

Selling a stock less than one year after you buy it could affect the percentage of tax you pay on the profit.

This website is about how to invest in common stocks for capital gains. Financial advisors also recommend that a percentage of your investment portfolio be allocated to bonds and cash. Five to 15 years before retirement, you should consider discontinuing new purchases of stock. Sell the remaining stocks in your portfolio as they hit their target prices and allocate the proceeds to bonds and cash.

Go to Trader's Portfolio.

Go to Investor's Portfolio.