Portfolio Allocation: Doing it Successfully

Setting up a strategy for how you will allocate your portfolios is important regardless of whether you are a beginner in the stock market or an experienced trader. The primary way to know how many stocks you should hold at the same time in the market is finding out how much money your portfolio is worth.

A portfolio focused on the kinds of stocks, and their value is more advocated for than just opening positions in as many different companies as you can. Additionally, traders who feel that they would like to invest in a variety of stocks could easily do so through ETFs. Through this investment, your number of holdings will be able to remain at their minimum. Additionally, having a simplified portfolio ensures you can be disciplined in your trading which is more likely to produce success in your investments.

So how exactly should you make your portfolio holdings?

The answer to this question depends on the size of your holdings regarding how much money you have invested. Following this procedure will provide a simplified breakdown for your holdings.

  • Investments of less than $4000 should have one stock or one 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
  • Greater than $500,000 = 10 – 15 stocks / positions depending

The model for this price range on your initial investments in stock was drafted by William O’Neil and CANSLIM investing. CANSLIM investing is the world’s most used investment strategy.

How Do Portfolio Holdings Promote Success in Stock Trading?

If you maintain consistent portfolio holdings, it is highly likely your stock trading will be successful. Portfolio holdings cause success in stock trading in the following ways:

  1. Concentrated Returns

Focused returns on several positions in the stock market incur a higher overall profit than minimal profit from many different positions. Below is a detailed example explaining this:

A trader could incur a high profit on his holdings in the same company. If he has one stock and its value increases by 10 percent in the stock market, this trader gains overall by ten percent. However, an investor who incurs a 10 percent profit in one stock but holds five different positions will only have a profit of 2 percent.

The above example is highly simplified but clearly, highlights the differences in the profitability of the two methods. To combat the vice versa happening on losses, traders with more focused portfolio holdings can place stop loss orders on their open positions for maximum profitability.

  1. Focused Portfolio Holdings Encourage Trading Discipline

It is the aim of any trader to find the best stocks for profitability. A seasoned stock trader will avoid guessing on what stocks would gain him a profit. Instead, he will look at the pool of stocks available to him on the market and narrow them down depending on analysis, news and other policies so as to remain with those that are likely to earn him a profit. Practicing more focused holdings with this strategy in place increases the probability that you will win in the stock market over time.