Portfolio Strategy – How does a profitable portfolio work? How do we keep our capital working hard? How do we make money in up trends? How do we survive during downtrends? Is your portfolio in good enough shape to weather all storms?
The Stockradar portfolio has been increasing in value over recent months, as have most other portfolios I would imagine. That has been a symptom of a rising market and that’s great but there is a reality that reminds us that although things are going ‘swimmingly’ we actually have to deal with all types of markets. A complete strategy must be robust enough or your portfolio will not survive. It is not necessarily about being a smart stock picker but rather being a good penny pincher. It is easy to build a survival portfolio if you take the necessary steps.
Corrections, big or little, occur regularly and that’s a fact. Another fact is we don’t how big or how long, just that they occur. How can we successfully ride these bumps not knowing? One of the fundamental truths of trading is that you don’t need to know what’s going to happen next to make money. Once we have a clear comprehension of that fact we can then move forward and develop a profitable process driven strategy that is prepared for all eventualities.
The key is to be prepared, as any good scout will tell you. And it’s very true we must always be prepared trade with a trend but also to protect our capital, as it’s our lifeline.
You can choose the safe and steadily profitable or the risky and most likely unprofitable. One way is controlled and relaxed and the other uncontrolled and stressful. These are the some of the many choices we make if we are to engage with the stock market as an investment vehicle. A good investment process by definition means one that makes money and the bad investment process is the one that loses money. That’s also a choice.
It comes down to this. If we intend to use the stock market as a good investment vehicle we have to do it properly and be very systematic about our investing. A choice.
A positive starting point is healthy and relaxed mind. It leads to successful investing. We then need to understand that we need to observe the market not predict it. We will win and we will lose; we have to have discipline to observe and respond appropriately so that winning becomes the norm.
So yes corrections come at regular intervals. You should have the confidence to be fully invested in a rising market but be prepared to get out take some small losses, wear some pain, and also lock in profits along the way. The good stocks will whether a storm best and they’re the ones you hold. The stocks that fail (at stops) need to go. The returns built up using a systematic process insulates you from serious damage and generates a steady profit profile, and ongoing absolute returns. That’s how a sound process must work.
It will all depend on how prepared we are and how we observe and react to signals generated. Our portfolios did navigate the sharp correction of the CFC in good shape because of observation and the ability to act appropriately. No guesswork and no hopeful praying! i.e just get out when stops are hit and don’t ever carry large drawdowns. It was one of those corrections that we didn’t know how big it would be but it certainly wasn’t one you wanted to ride out so taking that capital preservation route proved to be the correct decision as it always will, be the correction big or small. This also means you portfolio recovery will be strong coming off a much higher base then the market in general contracted to.
As an individual investor or SMSF manager you have a huge advantage over big funds.You can be nimble and move fast. Most funds are ‘stuck’ and are too big to sell. They have to ride the bumps and it’s the big ones that kill them as we have learnt. So to manage your own investment and keep the money in your name and your account is a huge advantage. It helps in many ways. As well as being nimble and having the ability to protect our capital at anytime, the next advantage is cost. Costs and fees can kill profitability, and there are many ways to pilfer your account – unless you manage it yourself. Online trading comes at a pittance these days. Why fritter away money when you don’t have to.
The next step is to have a process driven stock selection strategy that will ensure your capital is growing but at the same time keeps you safe so your investment process becomes a good one. Again it’s a choice. There are many common sense steps we can take. At each step we take we have a choice and this is simply a cognitive approach to realistically achieving our goals. Provided you make the right choices you will achieve them.