When it comes to managing your own portfolio, it appears that many individual investors lack some fundamental skills. The skills are not very difficult actually, but they do require focus, discipline, and implementation.
Let me give a brief overview of what is required to actually manage your portfolio.
- When beginning your portfolio, buy investments in "bite sized" pieces.
I do not recommend that an investor plunk down an entire bankroll all at once. If there are 10 positions that are going to be purchased, try buying them in 1/4 increments of your allocation goal. If your goal is 4% allocation in a stock, buy 1% at a time, for example. (That would be 25% of an entire purchase.)
Plunking down your entire nest egg at once, limits your options, and gives you much less flexibility. Not only that, but how do you know the stock won't drop tomorrow when you could have bought it cheaper?
Keep the basics of your financial house in order as well. You do not want to put everything you have into investments!
- Determine what kind of investor you actually are and what your ultimate goals are.
Are you a dividend income seeking investor, an aggressive growth stock investor, or maybe a little bit of each? Once you define what type of investor you are, determine what your ultimate goals are.
Are you seeking to save for retirement? Are you looking to amass a large sum of money in a short period of time, and willing to take the obvious risks? Do you need, or want, income? How long is your investing time horizon; 3 months, 3 years, 10 years, or maybe 3 days.
Once you honestly answer these basic questions, that only you can answer, you can invest, knowing you have a goal and an understanding in mind, of what you want to achieve.
I have two very different portfolios that have been developed right here on Seeking Alpha. Each portfolio can tap into the moderate/conservative approach and/or the aggressive to very aggressive approach.
The two portfolios are: The Team Alpha Retirement Portfolio, which focuses on dividend income as its primary focus. It tends to be moderately conservative. The second portfolio is the Young and Restless Retirement Portfolio, which is aimed at an aggressive, young investor with a much longer time horizon.
Our Team Alpha portfolio now consists of Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), General Dynamics (NYSE:GD), and iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF).
The portfolio currently yields a drop over 4.70% based on cost and over a 15 month period has increased in value by nearly 34%. It is a value portfolio that produces a solid income stream.
The "Young and Restless" portfolio consists of BlackBerry (BBRY), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), Yahoo (YHOO), Achillion (NASDAQ:ACHN), and Zynga (NASDAQ:ZNGA).
This portfolio focuses on aggressive growth with a higher risk profile. In just a few months time the portfolio has climbed 168% on an annualized basis.
- Know when to "hold'em" and know when to "fold'em".
Too many regular folks hang on to both losers and winners much too long. If you have a stock that has changed for the worse, cut your losses and move on. Don't "marry" stocks, try to have a financial relationship with them.
Stocks are nothing more than a conduit to hopefully help an investor prosper. For example; you might love Apple products, but is the stock growing the way you thought it would?
Just the other day, I sold Apple from our Young and Restless portfolio because of my perception that the company has stopped growing for now. Since that portfolio is an aggressive retirement portfolio, I felt it did not belong there any longer.
I took a small loss there, but others have done much, much worse.
Apple went from over $700/share down to under $450/share. Far too many investors fell in love with the "idea" that Apple shares would continue to rise indefinitely. They failed to come to terms with some warning signals that has caused the stock to drop precipitously. Many investors jumped on the Apple bandwagon well into the upper price ranges of $600-$700, with nothing more than an iPhone, an iPad, and euphoria. Those investors simply cannot wrap their minds around the fact that things will, and do, change.
Many are now seriously underwater and do not know how to let go.
On the other hand, Netflix has more than doubled in just a few short months. Does that mean it will double again in another few months? Taking profits in Netflix is NOT a sin, and I am suggesting that investors who have been following the Young and Restless portfolio, take chips off the table, now.
We can be "greedy" with Netflix by selling HALF of our position and continue owning the stock, but with the "house" money. That is a gambling phrase that any professional gambler will tell you is the key to money management.
Since Netflix has doubled, if we sell half of our position, we will get our original money back, and still have the stock to let run, write covered calls against, or to sell down the road.
- Take profits, take profits, take profits.
This is somewhat different than the previous bullet point in that it is not about a stock that has doubled. Recently I took profits in shares of Johnson & Johnson which is held in the Team Alpha portfolio.
I did not sell our entire position, but I took some chips off the table to rake in some profits and raise cash for other purchases. In this example, I had owned 125 shares of JNJ and sold 25 shares.
Not only did I take a few bucks in profits, but I also raised much needed cash for other investments. The portfolio still has a 6% allocation in this wonderful stock, and it will remain a core holding. The point, once again, is money management vis a vis; portfolio management.
We should be doing that with all of our positions from time to time. It is called re-balancing. Sort of like hedge trimming. We take some profits to balance the portfolio back to our desired allocation levels.
Personally, I like to look at the portfolio for possible re-balancing every quarter. Some investors do it once or twice a year. Some never do it, and that simply adds more risk, and gives a portfolio manager less flexibility to maneuver.
- Sell losers and find better investments.
There will be times when the fundamental reasons for owning a stock changes for the worse. The stock might have been dropping in price, but we did not want to sell it for all sorts of reasons; the dividends were too sweet, things will change for the better, or, it has been in the portfolio for 10 years, why sell it now?
These are dangerous strategies, especially if fundamentals change, or even if the business has changed within the sector. Take Annaly Capital for example.
NLY had been a core holding in the Team Alpha portfolio until the Federal Reserve decided to actually enter the same business that NLY was in, by buying mortgage backed securities to the tune of $40 billion per month, every month, until further notice. To me that was the red flag I needed to head for the exits, and I sold at just about the top.
I found other investments to replace plenty of the dividends, and sat back and waited. Lo and behold, I have gotten back into NLY at a 25% lower price, and now have THAT stock, as well as the others I initially replaced it with.
Not only did I find better investments at the time, but as things would have it, the game changed once again, and now I have NLY again.
- Understand what your risk tolerance is before investing.
This is an easy one. If you cannot sleep well at night because of your investments, you need to reduce your risks. Owning the next big thing can swing wildly, even while you are sleeping. If that keeps you awake and worrying, then owning stock such as that, is not right for you.
There are investors who use the term SWAN stocks. That means Sleep Well At Night. Lower risks, less volatility, and not many drastic price swings would be one solid definition of a SWAN stock.
Then there are the SAAN stocks; Stay Awake At Night stocks. Higher risks, higher volatility, and erratic price swings. I would put just about every penny stock around in this category, as well as a few "brand names" that are not quite ready for prime time.
- Buy the dips, add to the core.
In a portfolio of solid dividend paying, blue chip, mega cap stocks, there will be times when they correct, and drop in price. By following a sound money management approach, an investor should have at least 5-10% in cash reserves. The road to financial security becomes easier when you buy the dips in great stocks!
When those dividend winner stocks dip, it is time to buy the dip, and add to the core. By just doing that, the portfolio could rise exponentially, as well as create more income.
If you are lacking cash, you can write covered calls, or skim off some profits to build your reserves up for the next pullback.
My Management Style
In developing our two portfolios that I manage right here on Seeking Alpha, I am always questioned as to whether I am too quick to pull the trigger, especially when selling out of a position. I am also questioned about what appears to many, as being a "flip-flopper".
I will state this for the record; I will move in and out of stocks and positions when I feel that it is prudent. In today's world, things change every day, every hour, every minute. If one was to turn a deaf ear, or a blind eye to events that shape the financial landscape, then that investor could either lose money regularly, or miss opportunities that could produce huge profits.
Action To Take Right Now
As I mentioned earlier, it is time to sell half of the shares of Netflix that is held in the Young and Restless portfolio.
The share price has doubled and by taking this action, we will still own the stock but have our original investment back. That will be our cash pile to seek out the next "pot of gold" to own.
For more educational articles, please refer to these as I urge you to read each of them:
Knowledge is power, and when investors can put together the basics of portfolio management, a more secure financial future could be so much easier for everyone to achieve.
Disclosure: I am long AAPL, BBRY, BKCC, BMY, CSCO, CSX, GD, GE, JNJ, KO, MCD, NLY, O, PFF, T, XLV, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.