How to boost your portfolio returns
‘Holding the hot stocks and avoiding the dogs is the path to success when trading the stock market’.
This may seem an obvious statement but most investors find this difficult to achieve. Investors often try too hard when there are often some very simple common sense answers right in front of us. There is always a solution we just need to find it and then let it happen.
Let’s expand on the above statement just a little.
Holding the hot stocks, (that cause the positive ‘skew’ in your portfolio), and avoiding the dogs, (that ‘drag’ your portfolio down), is a path to success on the stock market.
Let’s examine these two necessary stock trading ‘efficiency’ aspects.
- Hold the hot stocks
- Drop the dogs
If you can do this you will always outperform the market’s major indices.
How we do it comes down to common sense and having proper analysis and money management filters.
The advantage of indices ETF’s is that you will hold the hot stocks but the disadvantage is you will also hold the dogs thus your performance matches the indices, less your cost of trading. Can we do better? The unequivocal answer is yes!
Drop the dogs
Let’s firstly take the second issue of avoiding the ‘dogs’. The simplest and most effective filter I know of is that if a stock starts trading in a consistent pattern of lower lows and lower highs, drop it, now. It’s likely to drop further. I’d rather be in cash if not another equity that is actually moving higher. Already we have made great progress in knowing what not to hold and improved portfolio performance.
Hold the hot stocks
Let’s now take the other side, how do we ensure we hold the hot stocks. Again a simple filter is, if a stock that trades in a consistent series of higher highs and higher lows it is in an up trend state and those we know not where they stop. Our terrific current examples in the US are FAANG stocks. If your not ‘there’ forget out-performance. Yes valuations are stretched on these stocks but remember markets always trade to excess and as long as the trend holds it means they are rising and making you money. When the trend changes out you go. If you want it to be that simple it can be.
In Australia we might currently talk about the big trends of TWE CTD CGF A2M QAN, CIM, CWY and ORI to name a few. All have had qualified trends, are rising, and have recently been out-performing the ASX/200 index. They are in the Stockradar portfolio. But what’s not?
The “what’s not” would include: TLS, SCG, WFD, BXB, NCM, OSH, HVN. All these leading stocks that take a big portion due to their weighting in the index are trending down and shouldn’t be held in a portfolio of stocks looking to outperform.
Our objective must be responsible and realistic and follow what we want to achieve and that is simple absolute returns each year. We don’t take risks and by following the above creed we achieve the objective in a relaxed and enjoyable manner. Being individual investors we have the luxury of having cash, not having to hold a certain percentage of funds in equity, and being flexible. Funds don’t have that luxury.
Risk is holding a stock that is going down. This may inspire some raised eyebrows but the big tip is don’t listen to the noise, follow a simple workable approach, don’t listen to others, keep expectations at a 10% growth rate each year, have a happy contented life and retire safely.
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