Wealth Building Portfolio Management

Portfolio Management - Ten Principals For Building Wealth Trading And Investing 

Divining stock market direction is both art and science, but in the real world of profit and loss, if I had to pick the one over riding principal to beat the market, I would have to say it's gaining Price Improvement (PI). PI simply means that whatever your entry point and exit, you always reenter the market at a more favorable price, than that which you had exited. It's simple and straightforward, but not many traders know how to do it.

The reason: Most traders do not know the precise reentry point to get back in the market where natural support and resistance takes place, for relatively low risk entries. I teach a method that allows investors to know and understand these precise reentry prices. Lets first begin with ten principals.

One: Only buy a stock you want to own. This allows you to trade without stops. Get out when the original reason for buying the stock has fundamentally changed.

Two: Scale in at no more than three (3) entry levels, as you build a 100% position. Try for a third each time, although two (2) entries at a half position each is just as well. What you should avoid, is banking your entire position at a single price level, -- unless you are trading from weekly and/or monthly charts at a strong support or resistance level near a moving average. I use two unique moving averages based on 89 periods, one being for short term while the other being for long term. I call this entire process Dynamic Dollar Cost Averaging (DDCA).

Three: Always take a profit on your first entry.

Four: Take profits on "faster" time frames than your original entry. For example: Let's say, you enter from a Daily chart. You look for a support or resistance level to exit from any time frame that's faster. It can be a 3, 5, 8, 13, 21, 24, or 34 min charts, depending upon how you view the stock. Generally, the smaller the time frame, the nearer the exit, and smaller the profit. I generally start with 8 or 13 min charts. If I'm comfortable with the position, and looking for a bigger move, I'll move to a 34 min chart and a bigger target. However, I almost never do this on the first entry. Also, you will notice my time frames are all fibonacci numbers.

Five: Limit your position on individual stocks to a maximum of 10% of your portfolio, but 3% to 5% percent is a more acceptable size. That should be based on liquidation value. So a portfolio with a $1,000,000 liquidation value should not have a single position with more than $100,000. Remember, we are not shooting for the fences, but instead building wealth over time! Individual sectors should be limited to 20% of your portfolio.

Six: Even when you achieve a 100% position, always look to exit a partial position at a resistance level, with the knowledge that the probability is great, you'll be able to buy the stock back cheaper. Every time you do this, you reduce the cost basis in the stock. Infact over time, the cost basis can be reduced 50% or more. The danger: If you exit your entire position, the market can get away from you, leaving you with no position. If that happens, don't fret. Just move on to another stock, while leaving in your buy points on the original stock. Most of the time the market will come back, and get you in.

Seven: Use only GTC orders, with orders executed during Regular Session hours. This will prevent fills in pre-market on bad news in a free fall. Review all entries before the opening to see if anything is close, so adjustments to entries can be made.

Eight: Never short individual stocks unless it's a daytrade. The risks are simply too great in the event of a takeover. Stops are no good. If you feel you must short a stock, buy Calls for protection, one (1) or two (2) strikes away.

Nine: Short ETF's as a balance against longs. No matter how bullish, you should have a long/short portfolio, with the percentage of shorts dependent on how you view the market. Extreme bearishness will dictate 70-80% shorts. Extreme bullishness will dictate 20-30% shorts.

Ten: Run a 13 day Moving Average of Your Equity. This will give you a clear idea on when you are entering a draw down period. Three (3) to (5) percent draw downs are normal. Maximum draw downs are in the 8-13% percent range.