The Importance of Managing Your Portfolio
By Timothy W. Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory free e-newsletter
Nearly every week we have a conversation with a subscriber who wants to know what we think of his portfolio of stocks. We happily oblige, but are then bombarded by a list of the 25 or 30 stocks he owns!
Many of these stocks might look good, but our response is always the same—we tell the subscriber that he owns too many stocks.
Both professional and novice investors fall into this trap. They forget that the objective is to make money, not to own every good-looking stock in the market. Historically, most successful growth stock investors have concentrated their portfolios in a few great stocks, and ridden those winners to big profits. That doesn't mean you should put all your eggs in one basket. Our advice is that, when fully invested, you should own no fewer than five stocks, but put an upper limit at 12 or 15 stocks. There are three main benefits of doing so.
First, you can keep up with all your stocks, and track what's happening at the companies. We do this full-time, more than 40 hours per week, but even we have trouble keeping track of two or three dozen stocks. So how's an individual going to do so?
Second, you'll get more bang for your buck. Really, it's simple math. If you own 25 stocks, each stock is about 4% of your portfolio. So if one of those stocks rises 50%, your overall portfolio rises just 2% (4% X 50% = 2%). And that's before taxes, which can bite off one-third or more of your profit. Ask yourself, how often do you find a stock that rises 50% or more in just a few months? In our experience, we pick just a handful of such stocks each year. So we want to make the most out of them! (If you own just eight stocks, and one of your stocks rises 50%, your overall portfolio is up more than 6%, a solid figure.)
Now, you may object that, "if my stock falls 50% it will do much more damage to a concentrated portfolio!" But if you always cut your losses short, you don't have to worry about this scenario. Thus, even in a concentrated portfolio, you can keep your risk at a tolerable level by cutting losses—yet, by letting profits run, you still have the potential to make big money.
A third benefit of a concentrated portfolio: You can get in and out of the market more quickly at turning points. Many investors turn bullish on the market and buy a few stocks but, because each stock is just a small piece of their portfolio, they're still woefully under-invested. Same goes when the market tops—selling just three out of 30 stocks does nothing, but selling three out of 12 is meaningful.
I could go on, but you get the point. When managing your portfolio of growth stocks, it pays to be concentrated in the market's leaders. So if you're currently holding a few dozen stocks, consider selling the poorest performers, and putting the proceeds in your best performers.
More Portfolio Management advice:
How to Systematically Assess Your Risk
A "position sheet" will give you a great view of your portfolio's risk and rewards.
How to Handle Stock Losses
Losses are part of the process—it's vital to think of them in the right way.
The Importance of Stop-Losses at Earnings Season
Stocks can rise on hope, but a bad earnings report can do a Hindenburg on an individual stock.
Consider Taxes Before You Invest
When you consider the taxes before you invest, you'll have a truer grasp of your portfolio.
Seven Short Selling Tips
We don't have any official recommendations for short selling, but if you're determined to sell short, here are seven tips.
Investing Tip: On Selling Stocks
Selling a losing stock quickly can prevent you from having to deal with a much larger loss.
The Importance of Having an Investing System
Here are three ways the market is actively trying to take your money and what you can do about it.
Three Changes to Improve Your Investing
A successful small change is much better for you (both financially and emotionally) than a big change that you can't make happen.
Rules to Protect You as the Market Climbs a Wall of Worry
These three rules will help you manage your portfolio.
Year-End Portfolio Review Helps Set Goals for Next Year
Each year end, I review my investing strengths and weaknesses, examining stock charts of previous buys and sells, comparing them to market action, and so on.
How to Watch Your Stocks
Checking your stocks often probably doesn't do any harm, but it does reveal something about you as an investor.
How to Manage Risk during Bear Markets
The secret to surviving the bear market, of course, is adapting.
How to Plan for Stock Investing Risk
Successful investors always consider risk when analyzing their portfolio, adhering to rules like cutting losses short and diversification.
What to Do During Market Corrections
Our advice today, "Just Sit Tight," is little changed from our advice a decade ago.
Investing Basics: Keep your Eye on the Ball
Three rules: follow the market's trend, cut your losses short and let your runners run.
Identify Your Investing System and Stick with It
The hard part, in our experience, is sticking with your investing system.
Stock Investing: Do You Want to Feel Right or Make Money?
Holding on to your losers while selling your winners may make you feel right but the best strategy is to cut your losses short while letting your winners run.
How to Average Up to Buy More of Your Best Stocks
Buying more of your best stocks can be dangerous if misused.
When to Sell Your Winning Stocks
What feels good to most investors is holding on to a big winner...and what feels bad is selling a big winner—but there are times when that's exactly what you should do.