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How To Use Stock Market Timing, Trend Analysis And Best Stock Picks To Fix A Broken Portfolio
By Geoff Green | April 25, 2008
Many new subscribers ask me how to use stock market trends and market timing to fix a broken portfolio and then begin to invest in our weekly best stock picks list.
As I write this post on 4/25/2008, it appears that the stock market is in a bullish bounce in a longer term bearish market. At least until the stock market proves that the longer term has changed to bullish then we will be cautious on stops and take profits when we have them.
This also may be a great time to get rid of those dogs in your portfolio and move to cash or into our best stock picks on a very selective basis.
The steps below will help you accomplish this. If you would like my opinion on any of your holdings just use this contact form:
Step 1 - Implement stop loss orders immediately
If our strategy is bullish, immediately either put a 10% sell stop loss under every one of your positions or sell them at the market if they are going down fast.
If our strategy is bearish and we are in a down-trending market, immediately sell at the market price or place a tighter stop, 5% for example.
Many investors balk at selling anything in their portfolios even as they watch their assets shrink drastically. One thing you have to get used to as a successful investor is to take losses early and quick. If you bought a stock because you thought it would go up and it doesn’t then you were wrong and you need to get out - NOW!
Consider what the downside is. Think of all the people that held Enron or Bear Stearns because “they are great companies and they’ll come back”. Don’t do that, every large loss starts out as a small loss. Get used to dumping under-performing stocks immediately, your profitable investing results depend on it.
Step 2 - Calculate optimal investing amount
Calculate what 10% of your total portfolio value is if all your stops were exercised or if you sold everything and went to 100% cash. Keep this number handy and adjust it as your portfolio value changes.
Step 3 - After you sell
Whenever you get stopped out of a position or the amount of cash in your account is at least 10% of your portfolio (step 2), review the stock market trend analysis, and market timeing current recommendations here on profitable investing.
If our strategy is buy stocks long, then select the first stock in the best stock picks list and invest 10% in that stock issue. If you have another 10%, put that money into the second stock on the list. Keep doing this until you have about 5% to 10% of the step 2 amount left in cash. Keep it in cash.
Immediately protect all new positions with the appropriate stop loss order.
If our strategy is 100% Cash then keep the proceeds in cash until the stock market trend changes.
Don’t ever, ever, ever invest more than 10% of your total portfolio in one stock. Revisit the Enron and Bear Stearns example again. If you have all your assets in one stock then you could be wiped out on a company failure.
If you have only 10% invested in each stock then a 10% stop loss will only affect your portfolio by 1% - you’ll have money left to recover.
Step 4 - Monitor and adjust stop loss orders
If your stocks recover and start trending upwards then adjust your stop orders accordingly. A great strategy to follow is to move your stop loss order up to 10% below the current stock price when the stock price has moved 20% up from your original stop order.
This strategy is great to protect your portfolio and capture profits as they are created.
Step 5 - Repeat steps 2 through 4
Over time these steps will get you out of stocks that are not in up-trends and into our best stock picks that are not only up-trending but are in up-trending sectors in an up-trending market.
Also, it will slowly get you out of the market in a down-trending market and preserve your portfolio in cash, ready to take advantage of the next established stock market uptrend.
If you have any questions or comments on this process you can comment on this post directly or feel free to contact me here.
As the author and owner of this article, you have my permission to publish these postings & articles electronically or on your own Web site, free of charge as long as the following by-line and functional Internet link is included in its entirety.
Written by Geoff Green, at http://profitable-investing.com Copyright 2008.
Topics: lessons, trading psychology |
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