One Question Every Investor Needs to Ask Themselves Today
One Question Every Investor Needs to Ask Themselves Today
Note from Michael Salvatore, Editor, TradeSmith Daily: Poring through the TradeSmith archives for inspiration, I recently came across this essay from TradeSmith CEO Keith Kaplan.
Keith's idea here is so powerful, it got me immediately to sell a number of stocks in my portfolio… and buy several more.
With the Thanksgiving holiday being a great time for reflection, I felt this piece was worth resharing with you, as we all prepare to get back into the swing of things next week.
Read on… and look out for another essential investing insight from Keith tomorrow.
— Michael
One Question Every Investor Needs to Ask Themselves Today
By Keith Kaplan, TradeSmith CEO
Longtime readers know I don't consider myself a financial "guru."
I'm just a regular guy who's made a bunch of mistakes and learned a lot of critical money lessons the hard way.
But as CEO of TradeSmith, I've also been fortunate to work with some brilliant investors, traders, and entrepreneurs over the years. And I've learned a great deal from these folks as well.
This week, I want to share a lesson I learned from my friend Brian Hunt, CEO of our corporate partner InvestorPlace and one of the best market "thinkers" I know.
It involves a simple yet little-used strategy that can dramatically improve your returns regardless of how you invest your money.
AI used to require a lot of knowledge and money to operate, which meant only big Wall Street funds could benefit from it. But that's all changed. If you can use a search engine like Google, you can use An-E. That's the level of computer savvy you need to use this service.
Which is why big hedge funds are going to be furious that for Black Friday...
As the name suggests, this strategy involves taking a hard look at every investment or trading position you own — stocks, bonds, ETFs, mutual funds, cryptos, you name it — and deciding if it still deserves a place in your portfolio today.
As I've explained, one of the most common mistakes investors make is holding onto losing positions too long.
Thanks to "loss aversion" — the tendency for the human brain to experience loss more intensely than an equivalent gain — we can come up with all kinds of excuses and rationalizations not to sell. Even professionals aren't immune.
The magic of this strategy is that it forces you to be objective and confront these mistakes before they become serious problems.
Conducting a position audit is as simple as asking yourself a single question about each position in your portfolio:
"If I didn't already hold this position, would I add it to my portfolio now?"
If the answer is "no," you should consider closing that position immediately.
Of course, exactly how you go about answering that question may vary depending on your investment approach and circumstances.
For example, if you're a fundamental investor, this might include confirming that a stock is still cheap (or at least not overvalued), that its business is still strong, and that its management team still has shareholders' interests at heart.
On the other hand, if you're a technical trader, this may include confirming that a stock or asset is still showing constructive price action, strong momentum, and healthy trading volume.
And, of course, if you're a TradeStops subscriber, it might be as easy as checking the current Health Indicator status for each position you own.
In any case, your goal with a position audit is to confirm the reason (or reasons) that initially led you to open the position is still valid today. If one or more of those reasons no longer exist, you may be better off closing that position and holding cash or redeploying that capital into a more promising idea.
A "second wave" of A.I. investments is about to pop – with 100x the potential of any gains so far. And if you take the right steps today, you could turn every $100 into $1,000... every $10,000 into $100,000... and beyond.
If you've never conducted a position audit before, you may be surprised by how many of your positions fail this simple test.
In fact, if you're like most folks, you may discover that you don't actually remember why you bought many of your positions in the first place. (This is another reason TradeSmith generally recommends holding no more than 50 positions at a given time. There's simply no way most folks can properly monitor a portfolio with hundreds of positions.)
You can apply this strategy to all positions in your portfolio, whether they're currently showing gains or losses. But it's crucial to use it on the losers, as these positions are already costing you money (and are more likely to continue to do so in the future).
You can be a bit more flexible with winning positions. It's often still a good idea to sell these positions if the reason(s) for owning them have changed. Doing so can help you avoid potential problems down the road. But there's also nothing wrong with "letting your winners run," so long as you use a trailing stop loss or another exit strategy to protect your gains.
Finally, while conducting a single audit can be helpful, this strategy is most valuable when used on a regular schedule.
For most investors, that means at least once per year. However, folks with larger portfolios, more frequent position turnover, or shorter holding periods could benefit from repeating this process every quarter or even every month.
As an added benefit, investors who audit their positions regularly often find they naturally become "choosier" when making new investments, which can further improve their long-term returns.
I hope you'll give this strategy a try… And if you do, we'd love to hear how it goes at feedback@TradeSmithDaily.com.
Using An-E is simple. Plug in a ticker and An-E gives you a great idea of where a stock price will most likely be in the next 30 days. Armed with that knowledge, you can quickly see the world of trade opportunities break wide open.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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