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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.
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.
Best returns and good luck this year,
Scott O'Neil
President, MarketSmith Incorporated
Follow Scott O'Neil at Twitter.com/WScottOneil
"Like" Scott O'Neil at http://www.facebook.com/WScottONeil
Thanks Scott for another helpful post.
Question - what % up would consider a position to be profitable in your discussion above before buying more positions?
Best Regards,
Greg Lawson
@greg_l_lawson If my current positions are up 2 to 3%, I would consider initiating additional positions.
Thanks for a dose of realism once again after the year end euphoria.
Bruce Bodner
Thanks again Scott,
That brings up a question about the reverse direction - say you been adding these 5-7% positions as they are all up 2-3% - but then the market pulls back and they all start going down - how do you decide to start cutting them back - ie how many and what % down on a position will you start selling?
@greg_l_lawson: As the environment weakens and I look to scale back my exposure, I start by selling stocks triggering sell rules. I evaluate each stock on its own merit and try and hold my best stocks the longest. This usually means selling the stocks that are down the most (or up the least) and letting my winners continue to run.
Thanks Scott,
Again - hypothetical - suppose the market is pulling back and none of your stocks individually are exhibiting sell rules - but many of them have the small profit pads disappearing to near zero or even negative but no where near 3-5% negative - is there a portfolio management guideline of when to start trimming positions?
If your stocks aren’t doing anything wrong, it’s ok to give them a little room. But if you are having doubts, I would take a hard look at your stock selection and entry points. If you are going to stick with a position, make sure your buy was correct.
The market seems to be acting well. Have you increased your exposure to more than 25%? if so, how invested are you now?
@arscot: You bet I have
Hi Scott,
As the market seems to be getting a bit overextended here, what would you say are the odds are that we will have some sort of pullback soon? Would you adjust your portfolio by selling the stocks that broke out but did not outperform during this market advance? I am assuming that if we go through a consolidation in the next few days, those stocks will probably decline below their buy points.
Thanks for your time.
Brahim
@berrada.brahim: Yes after today's move, the odds are good we will get a pullback soon. See my latest post: community.marketsmith.com/.../9712.aspx
Great Post. Thanks again!