Portfolio Management Tips For Stock Investors

Portfolio Management Tips For Stock Investors

On May 20, 2008, In Money Management, Trading Plans, by Steve Warshaw

Managing winners and losers wisely is one of the most difficult aspects of stock market trading to master. It takes many hours of research and monitoring in order to make all your trades work together as a successful portfolio. The work can be grueling, and emotional, but it is absolutely necessary in order to make consistent profits.

Portfolio management can be broken down into 4 simple categories: trade timing, asset allocation, journaling (or better yet blogging), and controlling trading costs.

Trade Timing

The reasons stock prices rise and fall endless; this uncertainty causes a very interesting yet unfortunate phenomonon. Most individual investors end up holding on to losers too long, hoping they’ll come back and “break even.” Conversely, as soon as a stock takes off and becomes a winner they succumb to the perceived notion that “what comes up must come down;” selling too early and leaving profit on the table.

Many traders search the internet, watch TV, and read books looking for some secret trading trick that will make them money. However, all successful traders know that the biggest secret to trading is no secret at all. They know simply that your trading plan must ensure your gains outweigh your losses. This means sell losers early and let winners run, exactly opposite of what the novice traders’ “gut” tells them.

I have seen it time and time again, and find it amazing that people become stressed when a stock moves up quickly. Take AAPL for instance. Apple shares were trading at $117.5 just 6 weeks ago. In the middle of April, just 3 weeks later, AAPL hit $155. All of a sudden people were saying things like “ready for a pullback” or “overdone, going short.” AAPL did pull back a whopping $6. Today, May 12th, AAPL is trading at $191.

On May 6th I wrote a post with the following comment

… Who cares what the analysts say; none of them are making any money this year, and I know plenty of individual investors who are up well over 20% this year. APPL is going up, it’ll bounce off of 200 – 205 and come back down some. Rather than waisting your time shorting, buy protective puts to cover yours position once it gets about $195. Take your profits once it drops to around $180 and use it to increase your position

The point is this, you must develop a trading plan that removes all emotion from your trades. Detail all of the points you use to pick a stock, initiate a trade, and manage your stop losses and profit points. Set rules for adjusting your trading plan as the stock market and your portfolio ebb and flow.

A word of caution. As mentioned before, many traders try to seek out some secret formula, or system, that will “guarantee” them profits. There are literally thousands of such systems and stock picking sites available all over the internet. They charge anywhere from $30 / month to several thousand dollars per month. Stay away from these programs! I am going to put a stake in the ground right now that will probably bring me plenty of pain from my fellow traders, and that is this:

Nobody else’s trading plan will work for you. You must develop your own plan that suits your individual financial and emotional requirements. It is however perfectly acceptable to study someone else’s trading plan and take away points that work for you.

You must write you trading plan down. Typing it out is ok, but writting it in a leather journal is even better. You’ll constantly be learning from your trades which you’ll track in a trading journal, and, every so often (not in the middle of a trade) you’ll go back and update and revise your trading plan.

Here are some basic requirements for every trading plan.

Determine profit points
Always determine and set automatic stop loss values
Determine and record the risk to reward ratio for every trade
Establish a core set of fundamental, technical, and “societal” values and statistics for initiating and exiting a trade
Write this core information down before you initiate a trade
Never update your trading plan for a stock with an open position. Close out the trade for a profit or loss and then revise your trading plan

Asset Allocation

Asset allocation relates to the number of shares, and diversity of investments contained within your portfolio. As you already know, some stocks will make you a profit, and some will cause you a loss. Having asset allocation rules built into your trading plan ensures that you will diversify your portolio and insure yourself against fluctuations in any single stock.

For those of you who have portfolios worth over $20,000, no one position should constitute over 5% of your portfolio value. The fastest way many traders get in trouble is by becoming overly excited about the latest “hot” stock tip and then over leverage themselves in 1 stock.

Finally, the stocks in your portfolio should span at least 5 different industries.Once again, by diversifying your assets, your protect yourself from market fluctuations in any one trade.

For Those of you who have portfolios worth between $1,000 and 19,999, I have written an article specifically aimed at keeping your trading costs from killing your profits.

Keeping a Trading Journal

Let’s take a look at the word futile. According to dictionary.com, the word futile means:

incapable of producing any result; ineffective; useless; not successful:

Any trader who doesn’t continually learn from each trade they make, and who does not take the time to systematically update their trading plan will be mired in futility. You must learn by keeping track of your progress, and the most obvious way to do this is through a journal, or better yet a blog.

Your journal should keep a daily log of all updates for each trade that you make. You are welcomed to format your journal anyway you like. I actually have a spreadsheet that contains all of my trading plan information relevant to each stock, and update that daily. I then record the conditions in which I enter and exit all trades in my trading journal.

In general, here are some guidelines for your template:

Why did you buy a stock
What emotions, feeling, thoughts did you have as the stock fluctuated up or down
What caused you to exit the stock, how did you feel, how could you better control your emotions so that you trading becomes more mechnical?
What is your profit or loss on the trade? A profit or loss only occurs after you closed the trade. As long as the trade is still open, you haven’t profited or taken a loss.

Controlling Trading Costs

When it come to investing, you simply can not ignore costs. Fees for mutual funds, ETF’s, and other trading instruments such as margin all eat into your overall profit.

The primary concern for most new investors is trading fees. Most reputable online brokerages charge between $7 and $10 per trade. That means you are paying anywhere from $14 to $20 in order to initiate and close any trade.

Let’s look at example. Let’s say you are a new trader with $5,000 to invest. Following the general rule that you do not want anymore than 5% of your total portfolio invested in any one stock, your maximum trade would be $250. If your fees for opening and closing the trade are between $14, and $20, you have to profit between 5% and 8% just to cover your trading fees. Obviously, that puts a major crimp on your successful trades.However, if your minimum trade was $1000, all of a sudden trading fees make up 1.4% to 2.0% of your trade, much better odds.

Clearly reducing costs for trading improves your overall bottom line. If you could get your trades for free, do you think that would improve your overall bottom line? Fortunately, there is one great company that offers these great savings:

The company is Zecco.com, an online brokerage started by one of the founders of Skype. Zecco offers 10 free trades per month to traders who carry a minimum of only $2,500 in their account. With 10 free trades, you can complete 5 full transactions every month for free. Also, trades beyond the first 10 are only $4.50 each.

A further benefit of using Zecco.com is their trading community. Remember the societal factors I mentioned you needed to consider in your trading plan? Well, the Zecco community is a great place to take the temperature of any stock.

If you have a larger account of $25,000+ Here are some great resources for free trades: