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Author Topic: Which is the best way to start following a portfolio?  (Read 30998 times)
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« on: September 05, 2006, 11:39:27 AM »

Once you have chosen which portfolio to follow, how should you enter in the proposed positions?

There is no perfect answer to this question on how to start following our portfolios. The two available strategies descibed below are valid and the choice depends on which way you prefer to manage volatility.
 
1- If you start by buying the stocks already held in the portfolio, then you may end up buying a stock that is almost at the end of its good run (but we have no way to tell you that before the sell order is actually released). This stock may then give you a poor return whereas it can show a good return in the portfolio because of its performance before you came on board.
2- You wait for the buy orders and you build your portfolio with time. This solution has the advantage that any stock you buy will show the same performance as what you will see in the portfolio on the web site. The drawback is that you may start by holding only a few stocks (maybe one), which is a poor strategy in terms of risk management.
 
Then, there is no best choice between the two solutions. It is more about what YOU prefer.
 
If you want an advice, we will give a little preference to the first solution as this solution is a better way of handling the volatility that comes with holding stocks. Also, if you have some knowledge of technical analysis, you may choose to buy first only the stocks you have a good feeling for.
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« Reply #1 on: April 19, 2007, 11:15:44 AM »

Here is an example taken on March 05, 2007.

On that date, the portfolio Ultimate Price Momentum v4 holds 5 stocks: TTH, IEX, TH, LPX and WIN.

The recommendations for Monday March 5th are:
Buy   FNI     First Nickel Inc.
Buy   RC      Rdm Corporation
Sell  TTH     Transition Therapeutics Inc

Let's have a look how to start a portfolio on that day with a capital to invest of $37.000:

To allocate this amount, each stock has to be a given a weight in the portfolio equal to its performance since on hold in the portfolio. The two new fresh recommended stocks, FNI and RC, have a weight of 1 because their performance as a new buy is 0%. 
For the 4 other stocks, their weight is:
* IEX, perf -36%, the weight is 1 - 0.36 = 0.64
* TH, perf -8%, the weight is 1 - 0.08 = 0.92
* LPX, perf +51%, the weight is 1 + 0.51 = 1.51
* WIN, perf +181%, the weight is 1 + 1.81 = 2.81

The total of the weights is then: 1 + 1 + 0.64 + 0.92 + 1.51 + 2.81 = 7.88

Now, to translate those weights into dollars to allocate for each position, we apply the following rule of three:
* FNI: 1 * 37000 / 7.88 = $4695
* RC: 1 * 37000 / 7.88 = $4695
* IEX: 0.64  * 37000 / 7.88 = $3005
* TH: 0.92  * 37000 / 7.88 = $4319
* LPX: 1.51  * 37000 / 7.88 = $7090
* WIN: 2.81 * 37000 / 7.88 = $13194

So, that is the way we allocate the capital in our portfolios, assuming that the capital is always fully invested.
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« Reply #2 on: April 27, 2007, 10:20:43 AM »

Hi,

Assuming that my portfolio is $ 40,000. And I decide to use ONLY the Momentum V3 strategy (currently has 2 stocks, ABT and VNX).

How many shares of each of these 2 stocks I should buy?

Do I keep some of the 40K capital in cash ready to purchase the next pick that may occur later on this week or next week ?

Mario
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« Reply #3 on: April 27, 2007, 10:22:46 AM »

Hello Mario,

Let me explain you first how we come up with the performances we show on the web site.

In our case, the whole amount is allocated in those two stocks ABT and VNX. But, not at 50% each. The weight of each stocks is equal to the performance the stock has made since on hold in the portfolio.
Here, we have VNX +14.79 and ABT -3.58%. The weights would then be: VNX 1 + 0.1479 = 1.1479 and ABT 1 - 0.0358 = 0.9642. The total weights in the portfolio are then: 1.1479 + 0.9642 = 2.1121

Now, the amount of dollars to be put in each position is found with the following rule of three:
VNX = $40,000 * 1.1479 / 2.1121 = $21739,50
ABT = $40,000 * 0.9642 / 2.1121 = $18260,50

Now, the next batch of orders are to be issued tonight and you never know if one of the stocks will become a sell or no. So, it makes sense not to move until the next orders are issued as our system is not designed for single day trades.

Then, the way we manage the weights of the stocks in our portfolios is to make calculations with all the capital always fully invested and get results the same way an index would be calculated.
It is ,on the opposite, much easier for a individual investor to break this rule and to weight the stocks without following our rules. You can go with an equal amount of shares or dollars in each position, you may choose to allocate $10,000 for each line, which will be valid until we get a fourth stock on board, in which case you will have to sell parts of your other lines or go on the margin...

The best way to go depends on your investor profile. Go with the way that is the easiest and the most efficient in your case.
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bryanmcn
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« Reply #4 on: April 27, 2007, 04:13:15 PM »

Reality Check:
I can't imagine someone buying and selling every stock in their portolio to match the proper weighting in order to match the portfolios performance. I think the portfolio has done well and I am doing better since I started following the strategy but to make your system believable a model portfolio should be created that holds some cash and actually buys and sells with commisions. It would be interesting to see the difference in performance. 
Also some stocks are rather illiquid. If a lightly traded stock is the only one in the portfolio, buying and selling large quantities will affect its price. 
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« Reply #5 on: April 30, 2007, 10:41:31 AM »

Hello bryanmcn,

Our portfolios are meant to be very volatile, that's the way you can get such long term performances.

You have to ask yourself if you can cope with such a volatility and if yes, you should try to keep as much invested as you can. The only restriction I see is if your portfolio is too small and the commissions eat to much of the performances.

I fell that there is a need to maintain a real portfolio to demonstrate that. It will not be on the main site but it can be done on the forum.

I propose to run 2 portfolios starting today. We can define the rules you would like to see in action.

I think that running 2 portfolios make sense, One big and one small, to illustrate the different money management for the two portfolios. It could follow the Ultimate Price Momentum v2 as it was mentioned a lot recently in the forum posts.

For the commissions, I will propose the classic rule of 9.95$ a trade.

I will then start two new threads to start following those two portfolios. The first post of these threads will summarize the rules used.
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bryanmcn
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« Reply #6 on: April 30, 2007, 02:33:18 PM »

This is great!
I'm looking forward to following these threads.
Thank you!
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« Reply #7 on: April 30, 2007, 09:55:59 PM »

Here are the links to those threads:
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