Supercharging Your Stock Investment Portfolio     

                                                                            01/09/2004       

Now that we have covered the scams you should avoid, the debt you need to be pay off, and the tax deferred and tax free investments to which you should give priority, we will talk about building a super portfolio.

If you have extra money that is not earmarked for your retirement, you can begin to invest more aggressively.
This means including growth (momentum) stocks, a few good value stocks, along with the contrarian picks recommended on the Tactical Investor or another good contrarian site. . 

Let me explain the difference between the types of stocks. I believe that there are three types of investors, the momentum buyers, the value investors, and the contrarian investors.  If you can pick a stock, or ETF that appeals to all three of these groups, you have a real winner!.  When you find one, please send me an Email,  please

Momentum investors usually invest in stocks above their 50-day moving average that have been an upward trend for at least 6 months.  A good example of a momentum stock is XMSR, (XM Satellite radio). They are not profitable yet, but the business has a good future outlook.  You can find momentum stocks in Money Magazine or the Friday issue of Investor’s Business Daily, which I highly recommend.  They have high relative strengths..

Value investors research fundamentals and invest in stocks with low price to earnings ratios, low debt and a high return on equity.  CBS Marketwatch.com has all of these figures under the section called “profile.” Warren Buffet is the ultimate value investor.  However, even if you invest in a value stock, make sure it is above its 200 day moving average and in an up trend.

Contrarians look for stocks and sectors that are out of favor or even hated by the general public.  They have patience, a great virtue for making loads of money.  They build a position in a stock or sector while the crowds dislike it.  In time, the sector becomes beloved by the masses. Then they sell into strength.  Sol is the ultimate contrarian advisor in my opinion. 

Which way should you go? How do you pick a stock or sector?  Let me give you a few pointers. I use a combination approach. I suggest 30% growth, 30% value, and 40% contrarian picks.  Now, if you want to trade a few options, which is another subject altogether, you should knock 5% off of each category and keep your options under 15% of your entire portfolio. 10% is even better.  I chose at this time not to trade options.  The reasons will be given in a future horrific and amusing segment.  And please, before you get used to buying stocks, do not sign up for an expensive options newsletter!
This will be money down the drain – fast.

I used to be a momentum investor but am becoming more and more contrarian the longer I work with the Tactical Investor.  However, I believe that a few good momentum stocks and a few value stocks in your portfolio are important too.  Momentum stocks should not be bought at the top!  Don’t just jump in on one and expect it to go higher. 
Wait for a pullback to at least the stock’s 20 exponential moving average.  The 50-day is even safer.  Then wait till it bounces off of that moving average line.  That is the time to buy it.

When investing in value stocks, I believe that with the new tax rules that reduce dividend interest, it is wise to look for a stock with a good dividend yield.  You will be surprised if you make a search of the internet how many stocks pay over 8% dividends.  Type in “high yielding stocks” in your search engine and you will find many of them.  It also pays to research how long this stock has been paying dividends and if the stock dividends have been increasing.

For the contrarian portion of your portfolio, (approximately 40%) use the recommendations in the Market Update.
They are all true contrarian picks.  I give them more weight than the other two categories because I have seen the results myself and they are great.  The only problem I have with many contrarian picks is that they tend to be in the same sector and your portfolio may become overloaded with oil and gas stocks at one point or gold stocks at another.  That is why I do not recommend a full 100% of your portfolio be allotted to contrarian stocks. 

When the major index indicators are above their 200-day moving average, the market is in an up trend, therefore we will invest in stocks.  However, remember what I wrote previously. Cash is king if the market is in a downtrend.  Believe me, this is an important rule to drum into your mind.  If all the people who lost trillions of dollars in the last bear market had been out of the market when the Dow, S&P 500, and the Nasdaq went below it’s 200 day moving average, they would be much better off now. Remember, if you lose 50% in the market, it takes 100% to recover that loss.  Think about this seriously.

Let’s go back to your portfolio.  It should have at least 20 stocks in it.  This way, if something happens to one of them, only 5% of your portfolio is affected. This is a good rule of thumb.  If you have a few ETFs (Exchange Traded Funds) they should be allotted 10% or two positions, but no more.  You want stocks that zig when others zag.  The value stocks will go up when the growth stocks go down and the contrarian stocks will slowly go up as time goes by.

Have a sell strategy. Hardly anyone has one. A trailing stop loss order is a good idea, but please don’t put it in your computer too close to the current price. 15% away is about right.  I know that sounds like a lot, but I have seen what goes on during the day and how the traders swoop down and get the stocks with tight stops on them.  They can see them if they having really good investing software.  I have seen them go down 5%, pick up a stock at a cheap price, and then within five minutes the stock goes back up to where it was before.  Once a week, check your portfolio and change your stops if the stock has gone up.  This way, your stop order will trail the price of the stock.  Some discount brokerages automatically offer this, but they usually charge higher fees to enter and exit a position.  I don’t have one that does, so I do it myself.

I bet you are thinking, what about mutual funds?  Well, in essence, you are building your own mutual fund and you are not paying anyone a load or management fee to do it.  It makes sense, and the stocks have been carefully selected – by the person who cares most about your money ---YOU. It really does not take that long.  Taking a few hours one night a week to go over your portfolio should be enough time. 

I hope you will profit safely from the ideas I have given you on how to build your investment portfolio.  We will touch on more risky vehicles like options and futures in the future. 

Have a Happy and Profitable New Year,

Tracey