Concentrate Your Portfolio to a Few Stocks 

It seems counterintuitive to concentrate your portfolio to just a few stocks but that is exactly what retail investors/traders should be doing.  Conventional wisdom suggests that one should diversify their portfolio.  

Wrong !  Wrong!  Wrong!

That is what we have been reading in the print (newspapers, investment magazines and blogs posted by self proclaimed gurus of the market) and TV media.  We have been taught by the financial advisors to invest in all different asset classes and diversify to reduce risk.  That is the way to mediocrity in my view.  When you diversify, you are actually exposing yourself to more risk across all different asset classes if you really think about it.  If you want exceptional performance results in the stock market than one must:

• Invest and trade growth stocks.  They tend to do 2 to 2.5 times better than the general market does.
• Identify true market leaders and have them on your watch list every week.  Figure our exactly when and where the ideal buy points are.  Have a plan in place to trigger your buys on those stocks.
• Always be ready to make initial small buys when IBD (Investors Business Daily declares a  "Follow Thru Day".  
• Build up  CASH  reserves in your trading account when the market pulse down grades to  "Market Under Pressure"  or  "Market in Correction".  CASH  is a position too.

Mr William J. O'Neil (Founder of Investors Business Daily) and the author of the book:

  

"How to Make Money in Stocks" (updated 4th edition)

has a whole chapter 12 in the book devoted to  Money Management.  I would highly recommend that you obtain a copy of this book and read it over several times.  I have 2 copies of the book - one by my bedside and one in my office at home.  It's one book that I always take with me when I travel.  Following is a quote from his book that resonates for retail investors/traders:

The more you diversify, the less you know about one area.  Many investors over diversify.  The best results are usually achieved through concentration, by putting your eggs in a few basket that you know well and watching them carefully

The winning investor's objective should be to have one or two big winners rather than dozens of very small profits.  Broad diversification is plainly and simply often a hedge for ignorance.  

Guidelines for # of Stocks in Your Portfolio

Following is a guideline that I utilize for retail investors that are actively participating in Growth Stock investing and trading.  If your portfolio is:

• Less than $100,000 - 3 to 4 stocks.
• $100,000 to $200,000 - 4 to 5 stocks.
• $200,000 to $500,000 - 5 to 6 stocks.
• $1,000,000 - 7 to 8 stocks.

When the market gets a  "Follow Thru Day", it would be quite OK to have a couple of more positions initiated than what the above guideline suggests.  Within a very short time, the laggards should be closed off even if they are in positive territory.  You want to force feed the  CASH  into the true market leaders that are outperforming.

It becomes hard to manage your portfolio effectively and build up a position in the winning stock over time.  Investors that had effectively a well diversified portfolio of  20  to  30  stocks, had to deal with the market crashes of   57%   in  2008/2009 market crash or  35%  crash recently  from Feb 19th through March 23rd.  Diversification certainly did not work and it never does.  It provides the retail investors with a false sense of security.  Utilizing the IBD principles, retail investors would be able to quickly transition gradually to  CASH   when the market begins to correct.

I am getting off to prepare myself for the big even tonight.  It's Sunday night here and my local team  TAMPA BAY BUCS  are playing with a home field advantage.  It's an exciting time for us in the Tampa Bay area.  

Go Bucs so We all can All Make the Big Bucks in the Stock Market

Happy Trading!

Amin