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Rebuilding Your Portfolio

By Charles S. Nemec - Email Editor

Date : January 12, 2010

Almost all investors sustained substantial losses in 2008. The S+P 500 index was down - 56% from the market high of October 2007. Even today, after a substantial rally the S+P 500 index is still down - 28%. As we begin 2010, it is time to review our current strategy, errors of the past and how best to prepare for future challenges. If an investor blindly follows the same path from the past, he may well get the same results.

The first step in a portfolio review is to study your losses. In general, portfolio losses may arise from either external or internal factors that affect stock prices. External factors are the broad forces of the economy such as Economic Growth or Contraction, Interest rates, Unemployment, Consumer Spending, Tax policy, Consumer Confidence and the overall Trend of the Dow Jones and other Indices.

Every day people cast their buy and sell ballots on the stock exchange. The major market indicators are a great summary of investor sentiment. We suggest all investors follow the big four:

• The Dow Jones Industrial Average (large blue chip companies)
• S+P 500 (large cap index representing all major industry groups)
• QQQQ (Nasdaq 100 index; mostly large cap Tech/Speculative stocks)
• Russell 2000 (mostly medium and small cap Speculative stocks)

Together these four gave a decisive sell signal by June of 2008, before the 6,000 point drop in the Dow Jones Industrial Average DJIA. A careful study of these Indices will go a long way toward reading the American economy and managing the Risk in your portfolio.

In addition to external factors, internal factors will drive the price of stocks. These may range from quarterly and yearly earnings, to sales estimates, news and analysts commentary about industry groups.

If you lost money in a stock, you should ferret out the cause. Did earnings come in below estimates? Are sales in a slump due to consumer spending? Is their market share increasing? Are profit margins growing or shrinking. All of these factors affect corporate earnings. A study of the company's financials will keep you out of harm's way. Lastly, look for signs of institutional block buying or selling. All you have to do is see the foot prints of the major players.

In addition to the above factors, evaluate your ability to manage risk. Do you or your advisor have specific written rules for selling? Do you consistently exercise discipline in selling losers? Failure to control risk results in big losses. Big losses demolish the return in a portfolio very fast. If you invest in equities, you will have losses. The difference between successful investors and not so successful investors lies in their discipline and ability to control losses.

CHECKLIST FOR REBUILDING YOUR PORTFOLIO:

CHECKLIST FOR REBUILDING YOUR PORTFOLIO:

1.  Look at the trend of the DJIA and/or the S+P 500. Don't "be long" unless a strong uptrend is in effect. If a strong downtrend is obvious, your only options are cash or being short. Trying to swim against the trend will cost you a lot of money. Believe what the market is trying to tell you.

2. Study your losses. Have written rules for when you sell out of a bad decision. When you enter a position, define what percentage loss you are willing to accept or how many dollars you are willing to lose.

3. Before you add a stock to your portfolio, look at the price trend. If demand is not increasing and pushing the price higher, think twice about investing. You are either too early or wrong. Both are expensive.

4.  Look for promising companies with improving earnings. Always look for the footprints of institutional investors. They are sophisticated investors who bet big on their research. Their footprints are reflected in charts by powerful trends, high volume, unusual volume spikes, volatility, and closes consistently at the high end of the daily trading range. Get a summary of large block trades.

5.  Look at how each stock is affecting your portfolio and your total return. Sell your losers quickly and hold your winners. Stocks that are performing poorly can wreck the return on a portfolio; plus they give you ulcers.

6.  Exercise Discipline. Focus on controlling losses and managing risk.

If you study each stock with a critical eye and focus on managingrisk you will be well on your way to repairing the damage of 2008. More importantly, you will be prepared for the next down turn in the market and that will have a tremendous impact on your portfolio.

Feel free to email us at info@trustmakers.com or call to discuss your options.

This information is intended for educational purposes only . It should not be considered a solicitation for the purchase or sale of securities. The purchase of securities should be based on proper due diligence of the risks, and suitability, as well as consultation with your investment advisor.

By Charles S. Nemec
TrustMakers.com

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