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Stock Portfolio Management - Important Factors to Consider

May 15th, 2020

Some investors prefer to manage a portfolio that consists of only stocks versus a collection of ETFS or Mutual Funds. It is definitely more challenging and difficult for individual self-directed investors to be good in this endeavor as clearly picking individual stocks is not a trivial activity. Frequently, self-directed investors enthusiastically begin this endeavor in earnest. But over time, finding the going not very satisfactory, they lose interest and eventually performance begins to suffer.

In this article we would like to highlight some important factors which self-directed investors may want to think about while they embark upon this exciting, and challenging activity.

Number of Stocks to Hold

The lesser the number of stocks the riskiness of the portfolio rises as does the potential for higher rewards. Some professional investors prefer to hold fewer positions but also monitor them closely so in case of any adverse, unexpected market moves they can quickly unwind their positions. But for most self-directed investors that may be a difficult choice to make. While having fewer positions is manageable for retail non-professional investors we believe at least 20 stocks will be a desirable number. But, if the overall portfolio value is small it may be more advantageous to hold fewer positions which are monitored very closely. It is not unsual for a single mutual fund or ETF to hold 100 different equities. But retail self-directed investors will not be able to manage such a large portfolio all by themselves.


Self-directed investors will need to understand diversification doesn't mean holding many stocks in a portfolio but holding a variety of stocks from different industry groups with minimal correlation between them. A diversified portfolio is expected to hedge against idiosynratic risk or stock selection risk but it will still not help if a systemic risk event occurs such as a broader market collapse. A single stock or sector risk is effectively hedged with diversification.

Market Capitalization and Style Tilt

Self-directed investors will need to be clear about the equity characteristics of each stock in their holding. Investors with a higher appetite for risk may add many smaller capitalization stocks whereas those more risk averse may hold positions of large capitalization stocks or even mega capitalization stocks. Stocks in the mid cap space provide excellent opportunities but they tend to be more volatile than large cap stocks. A small cap stock's typical market cap is less than $2 Billion. A Mid Cap stock's market cap is between $2 Billion and $8 Billion. Apart from choosing a capitalization mix for the holdings, the self-directed investor will need to be clear about whether they will be investing in growth or value stocks or mix of both. This style tilt is a very important determinant for a portfolio's performance. Over the last decade, growth stocks have clearly outperformed value stocks. Despite this underperformance many investors are averse to paying what they perceive to be overvalued growth stocks and stick to a value style. Some investors prefer to have a mix of both growth and value.

Stock Selection

Ultimately, stock selection plays a very vital part in managing a stock only portfolio. In the broad universe of small, mid and large cap stocks displaying growth or value characteristics, the investor has to pick the optimal stock for his or her portfolio. Here is where an investor's research and other stock selection skills come into play. Whatever the selection strategy used, the investor should be consistent in the application of such a strategy.

Position Allocation

How much to allocate for each stock in a portfolio clearly influences the performance of the portfolio. Investors clearly have a choice to make based on what they perceive to be the growth prospects of stocks they have selected. One consistent approach would be to equal weight each stock in a portfolio. For a portfolio with a capital of $20K if an investor chooses to hold 20 stocks - each stock will get an allocation of $1000. Some investors prefer market cap weighting in the sense the larger the market cap of the stock the higher the weight in the portfolio. This is a cap weighted strategy. Equal weighting results in slight underperformance for growth portfolios but value portfolios may see an advantage.

Entry and Exit Plan

Investors are often faced with a difficult choice of when to buy and sell a holding. A clear plan of action is essential for portfolio management. Technical Analysis can clearly help investors in this area. Important support/resistance areas are markers which some investors use to time their entry and exit. A very long term buy/hold strategy in a diversified portfolio typically suffers from a "reversion to the mean" behavior which can be avoided if above average paper profits can be locked in. On the downside, allowing a single stock to fall sharply by 30% to 40% will result in a longer, steeper climb to break even when the stock eventually recovers. A clear entry/exit plan, if followed consistently, can help a portfolio lock solid gains and avoid sharp losses.

As can be seen, managing a portfolio comprising only stocks is a very challenging and exciting exercise and self-directed investors who are disciplined and follow a systematic plan will succeed over the long run.

Good Luck and Safe Investing!