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5 Qualities That Will Make Or Break Your Portfolio


Many investors build their portfolio with the same methods that they use to cook at home. Throw together a combination of ingredients in varying quantities to create a seemingly cohesive meal. Yet at the end of the day, they probably don’t think about carefully measuring how this result was achieved or what took place to bring these individual items to a tasty conclusion.

Having a sound portfolio management plan is achieved with the same measured approach that a perfect recipe might be conceived. It takes time, tools, and discipline to implement properly. Furthermore, there are important qualities that must be reasoned and balanced to fit with your long-term objectives.

I have written about many of these qualities individually in great detail. Nevertheless, it endures repeating how these important elements can make or break your portfolio.

1. Investment Style – It’s important to define your investment style so that you understand its strengths and weaknesses. Some investors buy-and-hold for the long-term, while others are short-term traders. There are trend followers, value investors, technical mavens, fundamentalists, short sellers, and many others.

There is no holy grail in the stock market. Each of these systems will have periods when they shine and periods when they fall flat. Yet if you know what the downsides to your strategy are, it will make it easier to ride out the difficult moments and avoid stepping away from your core beliefs during periods of stress.

2. Security Selection – Some investors are keen on individual stocks, while others love ETFs, mutual funds, or options. The merits of each can be debated at length, but how you research and assemble these positions together will be your biggest driver of risk and return. My personal preference is to use ETFs for their low-cost, transparency, diversified holdings, and liquidity.

Remember that risk is always a double edged sword. It cuts in both directions. The same drivers of volatility and downside price action can also create periods of swift and massive gains.

Micro cap stocks have greater risk than large cap stocks. High yield bonds have different risk characteristics then treasury bonds. Those dynamics must be weighed and calculated in order to properly diversify or concentrate your asset allocation in the areas you feel will offer the greatest opportunity for stability or capital appreciation.

3. Position Size – Position size is probably one of the most important and overlooked areas of portfolio management. It can have a tremendous impact on your net returns. Some like to diversify amongst a great deal of smaller positions to mitigate certain risks, while others are more comfortable making big bets on single names.

I always love to ask those that crow the loudest about their top stock or asset class how big the position is in order to determine how much that contributed to real returns. A 1% position that gained 100% isn’t going to provide the same boost to your net worth that a 20% position will. Remember that your biggest positions are the ones you have to watch the closest.

4. Risk Management – There are many different ways to manage risk. Diversification, asset allocation, hedging, and stop losses are just some of the more popular options that many investors implement.

The thing about risk management is that the more measures you utilize, the more active you are going to have to be in order to constantly adjust for their impact. Each investor must carefully analyze the benefit of risk measures designed to safeguard capital against the cost of their end result.

For instance, a stop loss can help you move to cash when a position is heading south. Yet that same investment may ultimately trip your safe guard and reverse course while you are stuck on the sidelines. For some investors, that safety net is more important than trying to catch every twitch in the market.

5. Emotional Fortitude – One of the biggest risks that investors face are themselves. From a psychological standpoint, investors tend to get greedy when things are going well and fearful during periods of stress in the market. That vicious cycle can wreak havoc on your portfolio and cause you to deviate from your investment system.

In my experience, the most successful investors are able to look at the market with a counterintuitive mindset that allows them to capitalize on volatility. They also insulate themselves from the roller coaster ride of euphoria and panic.

It’s essential to control emotional triggers that lead to anxious decisions at inopportune times. Reducing stress may involve stepping away from the market or making incremental changes with calculated parameters to avoid full blown capitulation.

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Comment   |  3 years, 11 months ago from Irvine, CA