Your portfolio hasn't been doing well lately. Is it the general market that has been dragging down your investments, or merely your strategies or style of investing? If you think it could be the latter, then consider the following ideas that could help you to revitalize your portfolio.
Not many investors have perfected the art of timing the market successfully. This is not to say that investors should attempt to time the ups and downs in the overall market, but they should be aware of the existence of seasonal factors that can affect stocks and the entry and exit points in shares. (For related reading, see Capitalizing On Seasonal Effects.)
For example, there is an old saying on Wall Street that goes "sell in May and go away". Essentially, this means that stocks usually take a hit while heading into the summer months. Why, you ask? Well, keep in mind the expected work-related disruptions that happen during the summer months. For example, people go on vacations, while others have abbreviated work hours. The net effect results in less research, fewer sales calls and, in the end, less stock market volume. To put it in another way, there are fewer buyers around. This doesn't mean that you shouldn't be buying or owning stocks during the summer, but it does suggest that you be extra cautious about buying stocks when volume levels have waned, or when there is a sense of disinterest in the shares among other investors or Wall Street professionals.
Another time of year that can be tough is the fourth quarter, from October through December. Why? October has historically been a tough month for the stock market. And from that point on, funds and individuals often dump stocks in order to realize tax losses. This in turn leads to a lot of volatility. Unfortunately, it also makes timing an entry and an exit point extremely difficult. (To read more, see Trading Volume - Crowd Psychology.)
In short, investors can fine-tune their investment purchases and sales by at least being aware of the risks associated with seasonality in the stock market. (To read more, see Understanding Cycles - The Key To Market Timing.)
If you own a stock and firmly believe in its fundamentals, you should be willing to average up (or buy additional shares as the price is rising). This goes against the norm, but wouldn't you rather buy shares in a company that is under accumulation?
To be clear, you can use averaging down, but only in circumstances where you can be certain that the stock in question is getting hammered for something like tax-loss selling, which means that the sell off is in no way related to the company's fundamentals. In instances like these (tax-loss selling), you might make a great deal of money from buying more shares during a temporary drop based solely on supply and demand factors. But remember, there could be a fundamental reason the stock is dropping! In this case, you don't want to buy in on a dip, because you don't know if the worst is over, and/or if the stock will drop further. This leads me to another old Wall Street adage: "never catch a falling knife".
Again, investors can profit and improve their returns by investing during dips in stocks if there is no fundamental reason for the decline. They may also profit by averaging up into a stock that is under accumulation. (To learn more, see DCA: It Gets You In At The Bottom, Five Investing Pitfalls To Avoid, According to Investor's Business Daily.)
Do Your Own Research
Do yourself a favor and read financial newspapers and magazine and internet articles. Look at the company's website, and go to the Securities and Exchange Commission's (SEC) website to review corporate filings. Seek out research reports and compare them with your own thoughts and analysis. They may prove to be enlightening either from a macroeconomic or a company specific perspective. In any case, by doing your own research, not only will you be able to get a better handle on the direction of a company you are invested in, but you should be able to improve the overall returns in your portfolio. (To find out how to research your own companies, see Tailoring Your Investment Plan, Data Mining For Investing and What You Need To Know About Financial Statements.)
If you own 10 stocks in your portfolio and eight of them are relatively flat while two have gone up substantially, consider selling a portion of your winning holdings and buying into something else or plunging the money back into other stocks in your portfolio. You do not want too much of your net worth tied up in any one investment - this is the stock market and anything can happen. It may not be worth the risk. (For more on this topic, read The Importance Of Diversification.)
Stop Loss Orders
Consider trimming losers by setting a stop-loss order on your holdings. This will help you limit the potential for catastrophic losses. A good rule of thumb is to set stop losses at 15% below the buy-in price. Why 15%? Because this market is volatile! There is a distinct possibility that a couple of bad days in the market combined with some tax loss selling could drive down even the healthiest of stocks by 5% or 10%; therefore, it is not worth getting knocked out of the box for no reason. On the flip side, however, setting the stop loss helps investors by making certain they don't hold on to big-time losing positions that could drag down their overall portfolio's performance. (Read more about stop-loss orders in The Stop-Loss Order - Make Sure You Use It, The Basics Of Order Entry and Limiting Losses.)
If you consider and implement a few of these ideas, the changes to your portfolio could enhance your annual returns. Keep track of your portfolio returns and your investment strategy - if your returns are suffering, as few small changes may be all you need to get your portfolio back on track.
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