Daily Gains Letter

Take These Three Crucial Steps to Grow Your Portfolio

By for Daily Gains Letter |

investment strategiesA few days ago, I went out for lunch with a friend whom I haven’t seen in a while. He is an active investor who manages his own portfolio. In the past few years, he has done very well for himself, to say the least; the returns on his portfolio have been amazing, and much better than what the key stock indices have provided. This intrigued me, so I asked him how he was able to do all of this in a fairly short period of time.

His response was very short and simple. “You see,” he said, “while many investors look for the ‘ten baggers’ or ‘home runs’ and get emotionally attached to their position, I focus on an approach that’s the complete opposite.”

“What I have seen in my experiences in the past, and I see it very often, is that investors have expectations beyond reality,” he explained. “They want the highest return in the shortest period of time by risking a lot. You have to be very lucky to see robust portfolio growth over time with these types of investment strategies.”

With this strategy in mind, here are three crucial steps investors should follow to grow their portfolio.

1. Be on the Lookout and Act Accordingly

Investment opportunities are present all the time, no matter what kind of market it may be. Be it a bull market, bear market, or range-bound market, investors need to know what kind of investment strategies to use. Bringing back my friend’s example, he knew the direction the markets were following was to the upside, so he traded his way through in that direction.

Investors need to know that bear market investment strategies won’t work well in a bull market, and what investment strategies they may use in the sideways market will most likely not be profitable in the trending market.

2. Take Calculated Risks Only

Investors oftentimes go all-out and expose their portfolio to just one stock. This investment strategy is similar to hoping to win a lottery. It certainly can happen, providing great returns to the portfolio, but it’s too risky. What if the stock price goes down significantly? Investors should only allocate a certain amount of their portfolio to a position.

Say, for example, that your portfolio is valued at $10,000; consider an allocation maximum of 25%, or $2,500, on one trade, rather than going all-in. My active investor friend doesn’t recall risking more than 20% of his portfolio on just one trade.

3. Bias Can Kill a Portfolio

Having a bias can be very detrimental for your portfolio. Think of it this way: if an investor has a bias that the stock market is in a bubble and will crash and they have positioned themselves accordingly, if the key stock indices keep going up in the meantime, their losses can add up. And if they are short, they might end up getting a margin call.

Investors need to follow the direction of the market instead of picking tops and bottoms—it’s difficult, if not impossible to do. “Stay away from it” was the advice my friend gave me.

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