Folks, I’m going to share a portfolio-management secret with you today…
It’s a simple exercise that I do to make sure I know the ins and outs of every position I hold. And as you’ll see, you can easily incorporate it into your own investing workflow, too.
I just pretend a young kid is following me around, asking every young kid’s favorite question…
Why?
I’m serious… Every parent reading this essay knows what I’m talking about. And it works… It’s yet another way for you to figure out the right time to walk away from a position.
Here’s how to do it…
First, I look at how my portfolio is structured. I like to take a short-, medium-, and long-term approach. After dividing it up, I let the young kid start asking questions…
Why do I hold my long-term stocks?
I hold them because I believe they’ll still be phenomenal companies five years from now. They’ll grow steadily. And assuming their businesses don’t change dramatically, I’ll likely hold many of these stocks until I retire.
Sure, long-term investing is less exciting than trading or explosive growth stocks… But that’s the point. It’s an essential, low-risk part of the investing process. You need a bedrock of blue-chip, long-term positions to provide stability in your portfolio.
OK, kid, great job keeping me accountable over the long haul. Up next…
Why do I hold my medium-term stocks?
I hold them because I believe they’ll still be great companies over the next couple of years. They’ll experience solid growth and will hopefully continue moving higher. They aren’t the biggest household names like the long-term blue chips, but they’re still stable holdings.
Recently, one of my medium-term stocks fell into hard times. I was tempted to sell. And then, the young kid came out again…
Why did I want to sell this stock? And again, why was I holding it in the first place?
Answering the “why” questions made my decision easy…
Sure, the company was in a rough patch. But after looking into the negative news about it, I could see that it was still a great company.
I believed in the company’s ability to maintain its dominance over a specific area of the market. That’s why I bought it in the first place… So I decided to keep holding the stock.
Time will tell if that was the correct choice. But I believe it will be… By asking myself every young kid’s favorite question, I forced myself to look deeper into the company as it struggled. Next, let’s do it again with the final section of my portfolio…
Why do I hold my short-term stocks?
I hold them because I believe they’ll do well anywhere from the next couple of weeks up to a year. These are the news-based and momentum trades. I plan to get in quickly… and get out even faster if they aren’t panning out.
These are the “fun” parts of investing. That’s because when they work out… they really work out!
But of course, it’s still key to remain grounded. They don’t all work out. In fact, recently, a couple of my short-term stocks weren’t doing so hot. The young kid helped me again…
Why do I want to sell these short-term positions today?
These stocks were short-term trades… And I had already realized gains on them. So once they turned against my initial purchase reasoning, it was time to sell. That became clear to me as soon as I reminded myself why I had bought them in the first place.
Remember, young kids pick up on things that we don’t see as adults. And one of the key ways they do that is by always asking, “Why?“
They want to know the “why” behind every little thing. You should as well when it comes to your portfolio.
And as simple as this secret sounds, it works… By channeling a young kid, you’ll know everything you need to about every stock you own.
Good investing,
Karina Kovalcik
