My strategy is based around research. The bullet points below form what I like to call my Trifecta, the FTM’s of a company.
• F – The Fundamentals – The nitty gritty of the company.
• T – The Technicals – The price action of the stock.
• M – The Macro – How the broader global and national market is doing.
On top of FTM’s, there are some additional aspects to think about when building a portfolio.
- Portfolio Weighting:
Your risk tolerance and time line will help you determine how assets are structured within your portfolio; every investor has their own preferences.
For me, I like to have a few focused core positions, at around a 10% weighting. These core positions must be companies I have VERY strong conviction in. I like to use around half of my capital within these core positions. The rest I will hold for smaller weighted plays. This would cover younger companies with a very high risk/reward profile and companies I have built out a starter position in, whilst I do more extensive research using the FTM Trifecta.
My style is an aggressive one and as such my portfolio is volatile, averaging around 30% drawdown.
The main reason for this because my portfolio is very focussed, which exposes it to large moves in my top weighted stocks. I also like to add to positions as price’s fall as I would rather buy shares cheaper, than waiting for a breakout and then adding. I appreciate this is not a very popular tactic amongst investors however, I like to do it this way as it reduces the risk of missing large moves in the market. The result of this style of investing has been hugely rewarding for me and I don’t mind having a volatile portfolio as a result. The main thing i am focussing on is building a thesis that I’m confident in, which will result in a lot of upside potential over whatever time frame I’m working with. Whilst I recognise this isn’t for everyone, it is good to consider different trading styles as you become more experienced.
A popular strategy some investors like use, is to diversify their allocations using a format such as 60% of your portfolio allocated to stocks, leaving 40% of your portfolio for bond investments, or some combination of this. This would be less risky and volatile. However, I don’t do this as I’m focussing on high growth. Bonds are a safer option, however I typically wouldn’t consider them until I was older and needed some financial security.
Note: When there isn’t much opportunity in the market, I will hold positions in an index if I see potential there.
Also I do not like to hold over 30 stocks as it creates issues of over diversification, and I struggle to focus on that many stocks at once. During earnings season, which is four times a year, I update all my forecasts on the stocks I hold. I listen to the conference calls for every stock, check charting every few days and follow all news relating to each position. It’s much easier to focus on a maintaining smaller selection of stocks, especially as I’m always looking into new opportunities for investments, not all of this research will result in a stock being added to my portfolio. Which is also a downside to my style of investing.
- Risk and Reward:
For different people this means different things. Your risk tolerance greatly depends not only on your timeline, but also how the rise and fall of the market affects you psychologically. For example, if having a deep red day or month in your portfolio fills you with dread, you may prefer to build your portfolio to reduce volatility. There are several was to do this, such as trading only index’s or sticking with stable value companies. People that are risk averse and have portfolios structured this way will see smaller but consistent returns in general. Etoro gives me a risk score of 6 out of a possible 10. This only takes into account historical data but you can find an explanation of how this works here: To risk or not to risk? – eToro
I consider myself young with a long investing period ahead of me. As I approach a time in my life where I would like to ‘’retire’’, my portfolio will become more risk averse. It will switch from high growth to focus on consistent annual returns with minimum oversight.
I’m still enjoy red market days and treat them as a shopping day, where I can get some discounted assets. These red days fit my style perfectly. I will go into this more section 3 below on why this works for me.
One way that I reduce my risk, is to pick companies that I feel have very limited downside, but huge potential upside. I do this with a specific timeline in mind for each individual stock. Often I’m happier when price falls, as it means I can buy cheaper shares to add to my core position. Other investors prefer to manage their risk with stop losses or smaller position sizes. I prefer not to set stop losses, as this can result in my position being prematurely closed on price falling for a reason that does not affect your long-term thesis. For example an earnings report miss caused by a one off accounting change. I like to investigate the causes of why price has fallen and then I need to allow myself some time to understand if this changes my long-term thesis for the company. Often these short-term drops aren’t a reason to close a position but a reason to add to my position.
- Trimming and Adding Positions:
I mentioned earlier that I like red days in the market, because of how I manage my core positions as price moves up and down. As a rule of thumb, when the price of a stock moves up, I will close part of that position and take some of those gains. On the flip side when it price falls, I will open new positions in that stock, as long as I still believe in the long term thesis. I do this whilst holding a large portion of my core position, this just helps me control my emotions better by taking a bit of risk off the table.
How do it do it?
When I’m researching a company, I find key areas on the chart where I will draw my support and resistance lines. These help me identify my trim areas where I take profit. If price has reached a resistance line, where I have taken profit, then falls down to a previous support line, I will add back to the position. This isn’t fool proof, however as a general rule of thumb if you continue to add and trim inline with support and resistance, you will increase your profit. If your anything like me, this risk management helps me sleep at night. If price doesn’t pull back that’s also fine because doing this, helps me stop getting too overweight in any of my core positions. If I never trimmed, I could end up with some huge positions that were 50% of my portfolio, even by my standards that’s too much risk.
Sofi is a great example of how this can both reduce risk and increase returns. It consistently moves up to price target areas and then pulls back to support areas. I have added red dots to the image to show where I trimmed my position and green dots to show where I added back.
Types of stocks I like to research as potential investments:
• Companies with great fundamentals that are not reflected in the stock price. Such as beaten down stocks like $PYPL or $TFC. These are often what I call mean reversion stocks. I would normally hold these for a short period of time as price should move back to a fair value. You can learn how to value a company here.
• Companies working towards profitability for the first time or getting back there after a blip like $MTTR.
• Newer companies that have innovative technology that needs to be scaled up such as $ENVX. Typically these are smaller weightings for me as they are riskier.
• Companies that have short term headwinds affecting fundamentals but are lined up for a turn around. A good example of this is $TSLA or regional banks, affected by high rates which won’t be an issue forever.
Feel free to contact me here on at Etoro with any questions you may have.
