Ever notice how some individual investors have dozens of individual stocks in their portfolios? I’m not talking owning mutual funds, which is something altogether different, and not the topic of this report.
Instead, I’m talking about individual stocks. Just don’t own too many – seven is probably about the highest number any person should own at one time. And that’s only if you have at least $1 million to invest, and can spend some quality time with your stocks every day.
If that sounds like you, cool! In a minute, we’ll take a quick look at some portfolio management techniques. But say you’re starting out with about $3,000 to invest. (And by the way, it’s best to ignore all those so-called investing “gurus” who mean well, and tell you it’s possible to start investing with only a few hundred dollars. It sounds like a good, encouraging thing to tell newbies, and people who tell you that often mean to be helpful, but the truth is: With a small portfolio, the commission costs will eat away at your capital very fast. Even if you’re using a low-cost online brokerage, you have to be prepared to occasionally move in out of stocks fairly quickly. Don’t worry, we’re not talking about day trading!! But as we’ll see below, you sometimes have to move pretty fast to preserve your gains or cut your losses – so that’s one reason why it’s not really a smart idea to start with “only a few hundred dollars,” as so many well-meaning but clueless investment writers suggest.) OK – so back to your $3,000 portfolio. In this case, you’d be OK with no more than four stocks making up the entire portfolio. There’s a simple reason for this: You’re a busy person.
You can’t keep up with news, earnings reports and other developments about a whole slew of stocks. No one can. Mutual funds have paid research staffs – people who get money in exchange for spending their weekdays researching every last detail about a company and its stock. No one pays you to chase down these details, do they? And you’re probably not really inclined to spend your off-hours making lists of when earnings reports are due, how your company’s industry is faring and how its competition is doing, how global macroeconomic developments are affecting the company and its industry – you get the idea.
So keep it simple. By limiting yourself to just a handful of individual stocks, you can easily have some key facts at your fingertips, such as the date that earnings are reported. And for those of you with a life outside of stock investing, you could set an alarm on your computer or phone or PDA, so you know when it’s time to check your stock, and make a decision about holding, selling or buying when the quarterly earnings report rolls around.
Of course, there are also services that offer you sample portfolios and reminders of when an individual stock should be sold, or whether holding or buying more shares would be the best move. Simple Growth Investing offers that service. You can check it out here. However you decide to manage your portfolio, you’ll do best by keeping it simple. No big downside surprises when you forgot about an earnings announcement, or when a stock heads south because of poor news about its industry. By holding only a few stocks at a time, it’s much easier to keep up with developments that could have a big effect on the price.