July 8, 2014

Question: managing a portfolio and breakout signals

Dear KPL ji,
Do you limit the number of stocks in portfolio? If yes, how do you decide when to sell a holding and putting that into a fresh opportunity instead? Because in this kind of market, many stocks will give breakout signals. So I have 10 stocks or so already but can't decide whether putting more capital into new stocks is a good idea from overall risk management point of view. Your thoughts will be appreciated.
Vivek Deveshwar

I am trying to limit the number of stocks to 30 but find it difficult to do so (already crossed 45). However this large number is not a problem (emotionally) because of low investment per stock and deep stoplosses.

It is difficult not to feel greedy when a stock makes a new lifetime high or 52 week high or the breakout looks good, I am tempted to invest. I do have a volume filter which limits the stock universe size to 150-160 stocks. Also, my risk is managed so even if I buy the top I am not worried at all as loss is limited.

Regarding existing holdings, hold these with a trailing stoploss. This is what I do.

Managing new breakouts should not be a problem if you have sufficient capital and you do not invest more than 10K-20K in any stock.

Tracking existing positions should not be a problem as you need to change the SL only after market hours. If an SL is hit, you have to exit the position the next day. In my case, I have made a watchlist in Amibroker for open positions and also an AFL which tells me when the SL is hit. So tracking 40-50 stocks does not take more than 5-10 minutes.

Visit this link for the AFL and sample output of my real positions.

Your last question is important from a risk management point of view but not in the way most people imagine. The general thought is putting more capital in new stocks is risky. It is actually the opposite. This is because spreading your capital over 5 stocks is far riskier as compared to say 20-30 stocks. So basically you have diversified your risks by increasing the number of stocks in your portfolio. The flipside is beyond a certain point, including more stocks will not reduce the risk.

Ideal portfolio would be between 20-30 stocks. I have already made a page sometime ago called KPL 30 stocks... this is a diversified list of stocks. You can view this here.

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