Portfolio management involves risk management, but it might also take a little house cleaning to stay on track.
Part of this process involves mentally preparing yourself for great profits. Having the right mindset can begin with a few steps. The following 10 actions are designed to clear out the dead weight in your portfolio, your office and your mind to clear the way for better returns.
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1. Have a plan for profit.
Do this test: All your stops are hit tomorrow. What cash is left? Figure out how much your capital will be compromised. If it is uncomfortable, change something. Having a plan for profit and preparing for good outcomes means you have to always limit loss of capital. Your bottom line is your critical success factor. There is no other measure. (To learn more, read The Importance Of A Profit/Loss Plan.)
2. Get rid of moldy positions.
You are known by the positions you keep, so prepare to be profitable! Anything that isn't making money, be gone! Investing is the use of money to make more money. Positions that do not make money are a poor use of money.
3. Choose only good positions and avoid the bad ones.
There's an idea! But what does it mean? Make sure that price has direction before you lay your money down. Higher pivot highs and higher pivot lows show an upward trend of price. Trading with price direction makes money. Do what you know and know what you are doing at all times.
4. Review and organize.
Make a certain time, whether once a week or once a month, to review all of your finances. Keep paperwork organized. If your old binder is falling apart, maybe it is time to get a filing cabinet. Whatever it takes, get your paperwork and workspace in order. Our brains can only process so much information, so delete what you are not using - like the 500 watch-lists and articles you thought you might get to next week. What we pay attention to is what succeeds. (For more on this, read Get Organized With An Investment Analysis Form.)
5. Target your information source.
There is so much information available now that it is necessary to limit and direct your attention. Know what you are investing for, whether it is the dividend or capital growth, and then apply pertinent information. "Which book is the best book to read to be a trader?" There are hundreds of books and while all have value, not all tell us what we are trying to learn. When you have a goal, you can find a source that gives you the information you need. (For some of Investopedia's top picks, see Books Worth Investing In, Ten Books Every Investor Should Read and Investing Books It Pays To Read.)
6. Have a budget.
Plan carefully what money will be invested or used for trading capital. What does that mean? Don't trade with the mortgage payment. Don't trade with your savings. The money over and above your immediate needs and emergency savings is money you can put toward investing. Be sure that you trade with money that can be spared. You need to make it, save it and then learn how to grow it. Ideally, you should learn before you commit money. The game is won in the practice field, so practice trading and have a written plan of what you are going to do. (Read Get Your Budget In Fighting Shape and Six Months To A Better Budget to learn more on this topic.)
7. Have a profit vocabulary.
- Capital - Cash that is left over after day-to-day needs are met. Never invest with money you need to pay bills. Capital is the part of your savings that can be risked in an investment. The word "risk" is important here, because no investment is guaranteed. Build capital with a regular savings program. Building wealth is not just about making big profits. It is also about making a big commitment to saving part of your hard-earned money so it can work a second job for you.
- Capital Asset - Tangible property is considered a capital asset. In financial economics, capital assets include stocks or bonds.
- Capital Gain - The increase in the value of a capital asset that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the asset value compared to the purchase price.
- Profit - 1) Verb: The reason we risk money. 2) Noun: The part of a gain that we keep.
- Responsibility- What you take for everything you do as a trader.
8. Re-evaluate your strategies.
Are you buying stocks when the overall market is moving down? Look at what the overall market is doing. Regular practice improves results. Strategies that are effective in the market change from time to time, just as market cycles change. Price has cycles of expansion and contraction and a professional trader takes advantage of what the market is doing to profit. When you're experiencing a missing streak, change something. The market will not wait, so it's better to find out on paper first that your plan is not right.
9. Go over your financial and trading plan and be sure your positions fit the plan.
Do you have money allocated to savings? Are you watching the results of your IRA? Are you taking profits when there is a gain? Your position may have a gain, but it is not a profit until you bank it. Each goal may have a different time frame; make a clean sweep by coordinating your entire financial picture. (Learn to set your own rules in Ten Steps To Building A Winning Trading Plan.)
10. Be the chief financial officer of your wealth portfolio.
If that sounds daunting, it isn't. By signing checks, paying bills and making financial plans, you are doing it anyway - now all you have to do is learn the right way! Don't plan to trade, plan to profit.