Portfolio Concentration


I can remember as a child opening up the frozen orange juice, taking a bite and spitting it out because it was such an overpowering taste.  However, with the right amount of water, the orange juice was enjoyable to drink.  

Generally too little of water makes the orange juice taste sour, while too much makes it taste rather blah.  Your stock portfolio isn't much different than a can of orange juice concentrate, too few stocks and you're likely to not be able to handle the daily swing changes.  Too many stocks and you're likely to not get enough boost to your bottom line.

So how do you know what the right concentration level should be?  Each individual trader is different so it's important for you to go back and analyze your trading.  Do you get sick to your stomach when you have to take a loss or are you over excited because a stock is up 20%.  Do you pull the plug on your winners early?  Do you let the losing trades keep dropping?  

From a personal standpoint I've found that a portfolio between 8-15 stocks is generally right in my wheel house when I'm fully invested.   To reach that number of stocks I'll typically risk between .5% or 1% per trade.  For others, it might be a portfolio of 15-20 stocks risking .25% to .5%.  I will say that generally my max position is right around 12.5% of my portfolio value.

Naturally, with a concentrated portfolio you're going to experience greater swings in your portfolio value.  You're also going to catch a few trades to the downside that will cost you more than what you were willing to risk.  You might even under perform because the select few stocks in your portfolio aren't keeping pace with the market.  You'll even going to miss a few trades from your watchlist.

If you are consistently under performing the general market indexes with your group of stocks, then the first step is to look at the stock setups that you're choosing to trade.  If each trade is random in setup, then consistency is lacking in your process.  There is a wide array of trading setups that individuals use with great success.  As a trader, it's important to find one the fits your personal trading style and position size accordingly.   

Portfolio Summary

4.08% MTD | 15.46% YTD**


13 long


29 candidates  


**The YTD number in the original blog post was 17.06% this was a typo and error on my part.  It has since been corrected to reflect the right value.

The portfolio continued to improve this month due to the out performance of a selected group of stocks.  LITE, NPTN, OCLR, KRA, HDSN and UBNT have been the driving force this month.  A few others are simply hanging around. As I mentioned above, a stock in a concentrated portfolio can take a bigger bite out of your bottom line when you're wrong.  For the portfolio this month it was MXL after the earnings release.  In total is cost .85% of the portfolio's value. Not too damaging, but more than the .5% risk model.

Watchlist Summary

As the general market remains neutral over the past two months, stocks continue to breakout and create good trading opportunities.  Both screens are sitting at levels not seen since last summer which is good to see. One key to success right now is finding those stocks in the first or second base breakout and not trading those stocks that have been running for the past few years.  The money is rotating from those stocks into new ideas just like it always does.  I would suggest looking at your stocks from a weekly or monthly perspective and gauge the base that you're choosing to participate.  Below are just a handful of examples I shared last night from a monthly perspective.  Notice how they are in the early stages of their price trends.

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