Using Common Sense to Manage your Portfolio

This week I’d like to focus on evaluating your holdings, monitoring your watchlists and getting rid of losing stocks. And, as the tile suggests, there’s no particular magic in making money (or keeping it)—just good old fashion common sense. The trick is exercising it.

This week I’d like to focus on evaluating your holdings, monitoring your watchlists and getting rid of losing stocks.

And, as the tile suggests, there’s no particular magic in making money (or keeping it)—just good old fashion common sense. The trick is exercising it.

And in light of the recent volatility, now is the time to do it.

If you’ve used our Research Wizard program even for a short amount of time, you’ve either built your own proven, profitable screening strategies, or selected a few of the pre-defined strategies that came with the program and got started with those.

But once you’re in (or at least watching potential candidates to get into), it doesn’t mean your work is over.

Whatever your stocks are, whether they be actual holdings, or stocks you’re considering buying, don’t stop monitoring the fundamentals of those stocks.

What I mean can be demonstrated in the following example: If one of the criteria for getting into a stock in the first place was that it had a low Debt-to-Equity ratio, but the ratio then changes to an unacceptable level (a level that would not have put it on your radar screen in the first place), you should consider exiting and looking for a new stock to replace it with (i.e. one that currently meets your criteria).

Let’s say that you use the Zacks Rank as a timing indicator, and you look at the No. 1’s for immediate movers. If in a few weeks, as Zacks aggregates EPS estimate revisions, it sees that the prospects for the company’s earnings are to deteriorate, and degrades its rank to a 3 or 4. Take note and consider dumping it.

Sure it was a 1, but it’s not a 1 (or 2) anymore.

Think about it. If you never would have gotten into a 3 or a 4 in the first place, why would you now want to hold onto one?

That’s using your common sense.

What if you’re a momentum investor and you generally look for stocks trading within 10 percent of its 52-week high (a great item by the way), and it suddenly falls below that level. Well, if you’re only interested in focusing on stocks within 10 percent of its high, and it’s now 15 percent or 20 percent (or more) off its high...move on. The momentum has seemingly shifted—and so should your focus.

And don’t convince yourself to hang onto your losers either. If you got into a stock expecting great things and it’s now -10 percent against you, get out. Don’t let your love of a stock—or denial—ruin your portfolio. Almost every big losing trade anybody has ever had in their portfolio (-50 percent, -60 percent or even –90 percent or more), could have been gotten out of when they were just beginning to crumble.

And if you get out and it zips back up, you can always get back in if you want. But if it keeps going down, you’re just losing more and more money.

However, just because some stocks are going down, or others have changed their colors, doesn’t mean you should get rid of everything.

If one stock posts a negative surprise, casting it in a different light, but your other stocks still look as good fundamentally as they did when you first got in (a slight downdraft in price not-withstanding), sell the one that doesn’t fit the funnel anymore, and keep the one that does.

Too many people see a pullback in the market, or increased volatility, as a reason to bail out of everything. But historically, that’s not such a great idea. Instead, tighten up your stock picking criteria or at least tighten up your requirements for holding onto your stocks. This will make you a better and more disciplined investor, which ultimately means more profitable.

So once you’ve found the items that have proven to work well for you in picking profitable stocks, be sure to monitor those values. And if they no longer meet the winning criteria, get rid of them fast and find new ones that do.

The Research Wizard’s backtesting feature is the best way to do that! Backtest your strategies to see what works and what doesn’t.

Here’s three new stocks that look great and that are currently coming up on some of our best screening strategies.

CPLA Capella Education Co.
(from the Filtered Zacks Rank screen)

SEAB Seabright Insurance Holdings, Inc.
(from the Winning Ways screen)

SLF Sun Life Financial, Inc.
(from the Upgrades and Revisions2 screen)

Remember the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the powerful Screening and Backtesting ability of Research Wizard.

Take note: Backtesting isn’t available in all screeners (in fact it’s rarely available in any screener), but it is available in the Research Wizard.

Sign up now for your free trial of the Research Wizard. Pick and choose from some of our profitable strategies, or put your own ideas to the test and start making better decisions today. http://researchwiz.zacks.com

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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