No matter your trading experience you know that proper portfolio allocation is a crucial element that is often overlooked. It's overlooked by everyone, from professional to newbie. So don't feel bad. But what we need to do is nail down what we should be doing and that's why I invited Blain Reinkensmeyer owner of StockTradingToGo.com to give us some tips and tricks that we can use in our own portfolio. If you have any feedback please leave a comment and he'll get to you!
New and experienced investors alike should have a set strategy for portfolio allocation as far as the number of total holdings. The key to determining how many stocks should be held at once lies in knowing how much money is in the portfolio. This guide will breakdown the best rules for portfolio allocation.
Here on StockTradingToGo we support a more focused portfolio versus having a list of different holdings. Even for investors that want to remain diversified there are great ways to do so through ETFs so that the overall number of holdings can remain minimal. A simplified portfolio also supports investment success through discipline.
Portfolio Holdings Breakdown
Based on the total portfolio size total number holdings should follow this general diagram:
- Less than $4,000 = 1 stock / position
- $4,000 - $10,000 = 1 - 3 stocks / positions
- $10,000 - $20,000 = 1 - 5 stocks / positions
- $20,000 - $500,000 = up to 6 or 7 stocks / positions
- Great than $500,000 = 10 - 15 stocks / positions depending
Note: This model follows the philosophy of William O’Neil and CANSLIM investing.
Promoting Successful Investing
Investors that maintain a focused number of portfolio holdings are promoting successful investing in several important ways.
1. Concentrated Returns
Returns that are focused in several positions versus many positions are higher overall. To explain this concept here is a basic comparison:
Focused Returns: Investor holds 1 stock that goes up 10%, total return in the portfolio is 10%.
Non-Focused Returns: Investor holds 4 stocks and one goes up 10%, total return in the portfolio is 2.5% (.25 x .1).
This is a very simplified example but nonetheless reveals important results. And for those investors who argue the downside is just as substantial please read our guide for stop loss orders.
2. Lower Trade Commissions
Unless engaged in free stock trading it is smart to keep commissions to a bare minimum. Even with online stock brokers trading smart versus often can save investment capital. In a $1,000 portfolio for example ten trades at $9.99 would equate to $100 or 10% of the entire portfolio!
3. Promoting Disciplined Investing
The goal for any investor should always be to buy the best possible stocks to own versus playing the “hit or miss” game. Successful investors will take a list of several hundred stocks and narrow them to a handful before making a final choice. This practice ensures that the highest probability of wining is realized at all times.
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