This is one of the MOST important thing that you need to iron out if you want to put some structure around your investment philosophy. At the minimum, some thought needs to be given to each of the element given below:
- Asset Allocation: How much to put in stocks and how much in cash/debt funds?
- Diversification: How many stocks should you own?
- Buy Rule: What is the trigger for buying a stock?
- Bet Size: Once you found a good stock (any which way you care to define good), how much do you allocate for it? Do you want to put equal money on different stocks or do you want to bet heavily on stocks that you really like?
- Sell Rule: What is the trigger for selling a stock? How much to sell?
- Avg. Down or Ignore or Cut loss: Do you want to average down on a falling stock or do you want to cut your loss? For either what is the threshold for action? Or would you prefer to completely ignore it and do nothing?
- Default Strategy: What is your default strategy when no opportunities are available?
This is one area where I have experienced a broad range of thoughts and is very dynamic. Whenever I get a stable portfolio policy (which means that for at least one week there has been no tweaking of any parameter), I recorded it along with a version number. Right now I am on the 17th version!!!!
In my opinion it is well worth spending time to develop a portfolio policy thatworks for YOU. It should be something that you are comfortable with and something that goes with your character.
This might sound like a lot of work and it is - but the payoff is well worth it.
No comments:
Post a Comment