How to Manage your Portfolio with AIE

manage your portfolio with aie
How to manage your portfolio with AIE
Manage your portfolio with AIE

Through the AIE Trade Me Recommendation service, all the hard work has been taken out of the decision-making process. Our analytical team explores the markets, crunches the numbers, evaluates the Risk, and selects trading positions.

Each one of us has started with a various amount of investment capital, and with our own personal goals in mind. Of course, the end result is that we want to make money. But wanting to make money does not explain ‘how’ you achieve success in the stock market.

One of the most important factors with regards to the ‘how’ aspect of successful trading, is Money Management. It won’t matter how many winning trades you have if that one loss trade wipes out all the gains you have made, plus more. Hence, how to manage a balanced portfolio is critical to success.

Through this article, we will look at the most effective methods that you can adopt to help enhance your trading portfolio.

1) Strategy selection

You can manage portfolio Risk by choosing a strategy that suits your goals, and the amount of capital you have to invest. Unfortunately, it takes money to make money, so the smaller the amount of capital you have to start with, the greater the Risk you have in the markets.

Let me give you an example. Trader A starts with $1000. He implements a directional trading strategy, which has a lower probability of return but a higher profit potential. Placing $500 on the trade, he closes the position for a $100 return. Trader B starts with a $10,000 trading account. He implements the same directional trading strategy, and places $500 on the same trade, closing it for a $100 return.

Both traders placed the same trade, with the same amount of capital, and made the same dollar return. But as the following table depicts, there is a great difference in Risk and return in percentage terms

Strategy Selection
Table Showing Two Traders Risk and Return in Percentage Terms

What if this trade was a loss?

Trader A would lose 50% of their account. He would have only $500 left, and to return the account back to breakeven, would need to make 100% on the next trade. What if that next trade was a loss?

Whereas Trade B could lose $500 on this trade, and still have $9,500 left to continue trading. He has a much better portfolio management approach and can mitigate the Risk of a loss trade.

The Strategy that you select to trade with will have its own probabilities of success and failure. You need to select a strategy that suits the type of Risk that you are willing to adopt. Unfortunately, most people want low Risk money management, but adopt a high Risk strategy. This quite often results in a disconnect between reality and what the trader wants to achieve.

If you have any questions on the Risk profile of the strategy you use, call your broker to discuss.

The following table outlines (in a simplistic manner). The Risk level of various strategies using Cash as the starting benchmark for low risk:

Cash as the starting benchmark
Table showing Risk level of various strategies using Cash as the starting benchmark for low risk

2) Position size

As discussed in the previous example, the size of the position you trade in relation to your overall account size, can have a direct affect on the success of your trading. Having a small account and placing majority of it onto one trade, is a game of probabilities. You can win or you can lose. Hence, trading with less money is higher Risk. This is despite the fact that many people perceive that it is safer to start with a small amount of money in an effort to prove the investment strategy.

Diversification has been touted for decades as a key success to investing. When you have a small account, you can’t diversify. It certainly has merits, as companies can decline sharply due to various reasons, and by investing in multiple companies you can reduce your Risk exposure to a specific company.

The size of your investment positions is not just important in relation to the overall account size, but in management terms as well. If you entered various positions at different dollar sizes, the law of probability kicks in again, and will almost always work against you.
From our previous example, Trader B has an account size of $10,000 and is trading short-term directional strategies. The following table depicts various trades and their position sizes over time:

Various trades and position sizes over time
Table showing various trades and position sizes over time

This trader has had no consistency in their position placement. And the Risk of their portfolio is high due to 3 of these positions: BHP, WPL and WOW, which account for majority of their account. Imagine these three positions had all been 100% losses, just like the MQG trade?

One of the key management approaches we teach is to ensure you keep your trade sizes as similar as possible for each specific strategy you trade. It’s almost a guarantee that if you placed a larger valued trade, that this will be a loser. And when you place a smaller valued trade, it will be a winner.

This is one of the hidden reasons that traders don’t consider when managing their portfolio’s. By simply managing strategy positions at similar amounts, you can start to look for strengths and weaknesses in your trading approach.

3) Brokerage cost

You cannot buy and sell shares, options, futures, or currencies, without some cost of transaction. Like any business, you have a cost of operation and when it comes to investing in the stock market, brokerage is that cost.

But it is a fixed cost, and therefore, we can start to calculate what will be an efficient trade size to consider.

If our trader had minimum trade costs of $15 per side, if they used $100 on the trade, they would need to make a 30% return before covering costs! However, if that trade size were $1,000, then they would need to make a 3% return before covering costs. The larger trade size is more probable, more frequently.

As trade sizes increase, the brokerage costs will increase as well. However, brokerage will decrease in terms of percentage costs. Minimum brokerage fees kick in for small trading sizes. You need to be aware of your costs of trading, and as you increase your trading packet sizes, the impact of the cost of brokerage.

4) Portfolio Analysis

Finally, but certainly not of least importance, is regular evaluation of your trading results. Even though you have a service that provides you with statements of trades, and recommendations for entry, management and exit, how can you identify where you can improve on your results without knowing exactly what is going on.

I call this “working on your business”, rather than working in your business.

By putting some time into evaluating your trading results, you can look for trends in performance, compare results against overall stock market activity, and look for consistency’s or inconsistency’s that will help in the efficiency in how your account is traded.

At the very least, check your trades on a monthly basis. My preference is to keep a separate spreadsheet where I enter the trade details. What I am checking for is position size, win to loss ratio, average win/loss, trade performance in relation to market performance, and if I have been able to meet my expectations for returns for that trade.

If you implement all of the above portfolio management techniques, I am confident that with a proven investment/trading strategy, you will outperform anyone who otherwise leaves their portfolio management up to the “hope and pray” method.

Whenever I am evaluating accounts, 90% of the time improvement can be made purely from these techniques. I have seen clients making profitable trades, but their accounts are going backwards. This can easily be turned around by implementing a sound portfolio management process.

Trade Recommendations Service

If you would like a free trial of our trade recommendation service click here

Matthew Brown – US Stocks & Options specialist
US Equity & Option Client Advisor
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973

If you would like to learn more about the strategies you can use to profit from any type of market direction, visit www.australianinvestmenteducation.com.au or you can contact Matthew on brown@halifaxonline.com.au
Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.

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