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My Five Rules For Building A Portfolio
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Ever since I decided to "Rock A Full Portfolio" I have been having one my my best months to date. I attribute this to five different decisions I made when I decided to start testing out this trading strategy.
1) If the stock doesn't act as expected, dump it.
2) Hold short as well as long positions simultaneously.
3) Keep some cash on the sidelines just in case an opportunity presents itself.
4) Don't let the daily fluctuations force me to make quick unplanned decisions.
5) Pick stocks which have near term catalysts or look to be at a bottom.
--If the stock doesn't act as expected, dump it--
Each stock I picked I did so because I had expectations for it, usually to go in the direction that I had anticipated. Of the five stocks that I chose two decided to act unexpectedly.
The first, STP, seemed to be in a nice position to take advantage of rising oil costs. It was a solar play that had been lagging behind the other stocks in it's sector. I bought in at $47.62 just before oil started making its treck up to $120 a barrel. It started to trend between $45-48 and wasn't able to break out of the range. With oil hitting all time highs STP should have been breaking out so I decided to sell at a loss at $45.10. It is better to take the small loss and put the money elsewhere than hang in there with a sock that going against your research.
The only other pick that acted unexpectedly is Amazon. I sold short going into earnings because I expected them to guide down for the rest of the year and potentially have just an OK quarter. Both of these predictions did become true, and the stock did go down after earnings. What I hadn't anticipated was the market wide rally that happened just days before due to the amazing Google numbers. Google managed to carry every tech stock up 5-10% which prove to be awesome for my Apple pick, not so good for my short position in AMZN. I have decided to hold onto AMZN because I still feel it will go lower. It has backed off of its recent high and is now trending downward, back to where it was before the Google earnings. I still expect to make money off of this short position.
--Hold short as well as long positions simultaneously--
This rule is one of the primary reasons I have been in the green almost every day since picking this basket of stocks. During these turbulent times the market has seen some nice green days, as well as some ugly red ones. When the market is down, my short positions have kept my portfolio from seeing big losses. During the green days, a lot of the time my short positions have still been down because they are not good stocks. Having both short and long positions has really helped keep the equilibrium in place and I cant imagine ever being only one sided.
--Keep some cash on the sidelines just in case an opportunity presents itself--
You never know when a situation might come up where you need cash to pick up some stock. This happened on 4/28 when I was confident GLW would have a great quarter and I wanted to get in before earnings. They were showing some super bullish signs and It just seemed like a no brainer. If I hadn't had some cash around to buy GLW I would have had to sell another winning position to get some. Selling one winning stock to buy another doesn't change anything, but taking some cash and putting it to work does and I am glad I had the money ready to go.
--Don't let the daily fluctuations force me to make quick unplanned decisions--
This rule has proved itself time and time again. So much that it deserved it's own post back on 4/22. The best example of this has been my Under Armour position which has been on a downward trend for some time now. I have been short since 2/5 now and almost bought back on multiple occasions. Just before their recent earnings UA ran from $32 to $39. That put a serious dent in my position but I was confident they would have a bad quarter and was right. Just after earnings they fell from $39 back to $33. When the daily fluctuations are making you think twice about your position, sit back, pull up a 6 month chart, and remember why you chose this position in the first place.
--Pick stocks which have near term catalysts or look to be at a bottom--
Deciding when to get in on a position is one of the hardest parts of portfolio building. One strategy I have used with great success is getting in on stocks juuuust before a near term catalyst. The reason you do this is because you don't want to get stuck in a position that keeps fluctuating between profitable, and in the red, green, red etc. For example, I decided to buy GLW just before it's earnings announcement and just as the 50 day moving average crossed the 200. I got in at $25.93 the day before earnings and found the stock up a full dollar the very next day. If it had gone down, I would have sold, but since it went up, now I can hang on knowing that it is well above my buy in price. I can even put a stop in at $26 to make sure I don't lose any money on the investment.
Testing different strategies and recording their results was the primary reason I started this blog and this is a perfect example. So far over the last month I have had one of my most profitable months to date (up over 20%) while testing a strategy I had never tried before. I don't think I have ever had more than 4-5 stocks at once. It has been a real learning experience, and I plan on sticking with this strategy for some time. |
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This site is not just a place for me to speak my mind, my goal is for these posts to be a catalyst for conversation. If I have stimulated some thoughts/ideas please be sure to contribute below. Dont be shy =)
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