This morning, the market action is continuing the subtle firming which began January 3. Many of the stocks on my watch list and the Growth 250 are only fractionally down today after being mostly positive since the year began. Based on this action, I am slowly wading in deeper and would like to be about 25% invested soon.

 

 

But starting the year off right requires patience. Human nature makes us want to start running right out of gate so that we “get in ahead of the others.” That is why risk management is especially important at the beginning of the year. We need to be extra careful when there are a number of tempting patterns all trying to draw us in. If you buy aggressively without a profit cushion, you’ll be much more susceptible to the first dip or natural fluctuation the market takes. Psychologically, that puts you in a hole that can be tough to work out of.

 

 

Since we all start the year without a profit cushion, it’s best to wade in incrementally.  I prefer to buy one or two stocks at first (roughly 5-7% of the portfolio), then wait until those positions prove profitable before buying a third. It’s much easier to build on a profitable foundation, and psychologically I am coming from an area of confidence and strength.

 

 

January tends to be a difficult month. I’m not convinced we’ve seen the end of the volatile, news-driven market environment, and another earnings season is now upon us. Until this market develops some clear legs (and it’s trying), try and fight the concern of missing out. Approach it with discipline and patience—and ready your watch lists with a daily review.

 

 

You might consider structuring your “Portfolio Watch List” in MarketSmith with the major market indices included. See the example below. (Please note these are not my actual positions). Structuring the portfolio in this way makes it obvious when a stock in the portfolio begins to under or outperform the market. By comparing the intraday and year-to-date price % change data of my positions against the broad market I know whether its time to be more aggressive, pare back my exposure or refocus my approach entirely. Allowing performance to guide you, removes emotion from your decision making, and ensures patience and discipline prevail.

 

 Portfolio

 

Best returns and good luck this year,

Best Returns,  

 

Scott O'Neil

President, MarketSmith Incorporated

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