How to Manage Your Portfolio in Response to Market Action

When investing in the market, it is important to be a good observer of the price action of stocks within your own portfolio as a key to your own strategy.

Steps

1. When investing in the stock market it is important to avoid "Putting your eggs in one basket". That is, diversification in multiple different stocks is important to minimize the risk of a single investment having too much of an influence on your overall financial health.
2. A very interesting book that is well worth the read, is Robert Lichello's book: "How to Make $1,000,000 in the Stock Market---Automatically.". He tries to have his portfolio shift back and forth between cash and equities automatically.
3. Track your investments all in one place . This way you can see the movement of your stocks. Portfolio Managers like Mint.com and Wikinvest.com help you do that.
4. William O'Neill, of CANSLIM fame, the publisher of the Investor's Business Daily, and the author of "How to Make Money in Stocks" also believes in watching one's own portfolio, often if the market is doing poorly, then your own stocks will also be heavily affected and do poorly, possibly even hitting sale points on the downside.
5. When building your portfolio, start in "neutral": half equities, and half cash. That is, you need to predetermine the maximum number of stocks you wish to be managing. Go for at least 12 stocks and up to maybe 24 or 25 positions. Below that would not give enough diversification, and more than that would be difficult to manage.
6. Set your sale percentage at a loss. For instance, you might want to sell all of your shares if they hit an 8% loss (as William O'Neil suggests), and also sell you positions if they go back to break-even after a first sale at a gain, or if they retrace 50% of the highest percentage gain if you have sold more than once. The last is a bit confusing, but let it suffice to say that if you have sold 1/6 of a holding at a 90% gain, then if the stock retraces to a 45% gain, 1/2 of the top gain sale, then you would also sell all remaining shares.
7. Use these sales as signals for portfolio management: sales on 'bad news'; that is a drop in the price of a stock mean "caution", and sit on your hands with the money. The only exception to this is if you are down to your minimum exposure in equities and you sell a stock, then you should plan on replacing the position with another stock. What is the "minimum"? Half of neutral. That is if neutral for 24 positions is 12, then the minimum would be 6 positions with 75% of the value in cash. Maximum is double the neutral position. A sale on 'good news', that is on a targeted gain, is "good news" or a bullish sign meaning that it is safe to add a new position, moving your portfolio towards full investment.
8. This seemingly complex maneuver will hopefully help you shift your holdings from cash to equity in a good market, and the reverse in a bearish environment. This also avoids my own past problem of compounding my losses--that is buying a stock you just sold on a small loss, only to see the new investment go on and lose some more money!

Tips

• Since most markets tend to move in the same direction at the same time (known as positive correlation), it may not be enough to diversify into equities in different markets (eg, the USA and Europe).
• If you are not confident about your ability to manage your money long term, a useful solution is to diversify into different asset classes. This means holding a percentage of your portfolio in things like government and commercial bonds (debt instruments), commercial property, money market accounts and commodities.
• Most investors will not be experts in all these areas, nor will most experts! This means that for many people, finding collective investment funds in different asset groups will be the most obvious choice. These funds might be mutual funds, investment trusts, unit trusts or a sicav depending upon your location.

Warnings

• Remember to consult with your professional investment advisors prior to making any investment decisions based on this information.

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