Simplify Your Portfolio

When it comes to investing your money you have to learn to play by the rules. Those rules are ultimately determined by you the investor and no one else. They are built through the experience of putting your money into various investments under different scenarios and learning from what happens. In other words, experience really is the best teacher. In all the conversations I have had with investors over the years I hear similar war stories of how they did something stupid and learned a valuable lesson. Those stupid decisions many times are doing things they didn’t understand or taking risk that didn’t equate to their psychological profile. This is why I try to tell investors everyday – KISS, Keep it So Simple! In fact, Keep It So Simple – You Can Do It! The process of investing can get as complicated as you want, but for the average investor simple is better. Here are some simple rules I follow everyday in my own portfolio and in advising other investors:

• Manage Risk in your portfolio! I cannot say this loud enough or strong enough. When markets get volatile like they have for the last nine months reduce the risk in your portfolio. Raise cash to buffer the volatility. Owning cash is not a sin! I promise you will not read that anywhere other than your mind. Use stops to prevent your emotions from taking over and creating larger losses.
  
• Watching the game sometimes is more interesting than playing. Watching the markets churn is better than playing. Sometimes taking a break is winning. You can learn a lot from sitting back and watching what is going on versus having money in the game. I am a big football fan. I have learned that betting on the game creates too much stress. I have also learned they are not paying me to be the coach. So it is more fun to sit in the stands and watch the game for the entertainment value it is. The market sometimes is better observed than played.
  
• Volatility versus Information. Investors react to news or information and that in turn creates volatility. I have learned to evaluate the news source relative to the investment. Learning that most investors are lemmings and they follow the crowd is important. Sometimes it is better to be a salmon and swim upstream. Know what you want, know why you have it, and make your own decisions how to play it.
  
• Risk and time go hand-in-hand. Know what your goal is! This is vital to investing. The old adage of sell hope and buy despair works more than you think. Link the amount of risk you are willing to take to the timeframe you are willing to hold.
  
• Don’t fall in love. Emotions are the number one enemy to investing. Having a disciplined strategy means having an entry price, stop price, and target price. This allows you to manage your position proactively versus reactively.
  
• Ready, Fire, Aim. Every trade/investment must be accompanied by an exit strategy. This is risk management 101. Don’t rationalize holding your losses. Ban the phrase, “I will sell it when I breakeven.” What about those who held Enron stock. As I stated at the beginning knowing what you want is key, knowing how you are going to go about getting it is equally important. Strategy.
  

You are the solution to your portfolio. Too often we want others to tell us what to buy or sell. The challenge with that is you don’t know what their strategy is. Only you can control the strategy for your money. For example, have you ever read a prospectus for a mutual fund? Inside they describe the objective of the fund. Read one sometime and tell me if you really understand the strategy of how they are going to manage the money invested in the fund. Therefore, you have to have a strategy based on the historical statistics of the fund. Notice I didn’t say the historical performance. I am interested in the historical statistics of alpha, beta, r-squared, standard deviation, etc. Why? It tells me how the fund performs under various market conditions. Then I can make a decision on how to invest in the fund to achieve my goals. Remember the role of financial institutions is to get you to give them your money, for as long as possible, so they can make as much as possible, returning you as little as possible. (Joke) My point here is simple…take control of your chosen investments and build your portfolio based on your goals and objectives. This will lead most of you to building simple portfolios that you can understand and control. You can always learn to make investing more complex if you understand the fundamentals. Learning to walk is imperative to learning to run. Investing is no different.

When you look at your portfolio of investments if you cannot state why you own each one and what the strategy is behind each one, you are not in control. It’s your money - manage it. Learn to keep is so simple – you can do it.