Investing is likely to be most rewarding for those who are prepared to make a long-term commitment to it. As Japanese-American investment guru Robert Kiyosaki says: 'It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.'
You do not need to be sat at your computer every day obsessively checking your individual investments. But you should be prepared to carry out regular maintenance of your overall portfolio to ensure that your money continues to 'work hard' for you.
There are several tools and techniques at your disposal to assist you in managing your portfolio, including stop loss and limit orders. These support effective risk management which is probably the most important element in a successful investment strategy.
The most potent investors are not automatons who never make mistakes. But they will tend to be much better at ensuring their mistakes do not destroy too much value, and are typically good at running their winners and cutting their losses.
You have never had a greater suite of tools at your disposal to manage your portfolio. Most stockbroking accounts now include an online platform which allows you to take a bird’s eye view of your investments. This should include information on their current market value and the notional profit or loss positions. You can also look at your dealing history and use orders to manage positions when you are not logged on.
MARKET INSIGHT
Timing investments correctly is a real art, but you can arm yourself with a measure of protection using stop loss and limit orders.
Stop losses are available through most stockbrokers and can be set somewhere below the point at which you bought an individual stock - 20% is a good rule of thumb. So, if you bought shares in Company X at 100p the stop would be set at 80p.
If the market falls and hits this predetermined stop price, an order will be triggered, and the position automatically sold at the next available price. Limit orders close a position automatically if the market rises to a previously agreed target or trigger a buy trade if the market falls to an attractive entry point.
Almost as costly as a position running out of control is taking a profit too early and a trailing stop loss can be a good way of ensuring you make the most out of your winners. A trailing stop tracks your profitable positions automatically - and closes the trade should the market move against you.
By following share price charts, you can look for support and resistance levels. If you look at the share price of a company over a 12-month period, there are likely to be several points when it has fallen or risen to a certain level before changing direction. Information providers like SharePad and MoneyAM can help you identify these pricing points and this can be a useful guide on where to place your limit and stop loss orders.
BIG PICTURE THINKING
As well as managing your investments day-to-day it is also worth keeping watch on the bigger picture.
The proportion of your portfolio you allocate to distinct asset classes will depend on your investment profile and appetite for risk and to keep these proportions in line you will need to manage your portfolio actively through a process known as rebalancing.
If, for example, you started out with 40% of your portfolio in equities and 60% in bonds and share prices went up while the bond market crashed, those proportions would move out of line with your targeted mix.
This is where rebalancing comes in. The idea is to periodically sell assets that have gone up and buy more of those that have fallen, to get back to your planned allocation. This helps to keep a more consistent level of risk exposure and encourages the discipline of selling assets that have appreciated and buying those that may have become relatively undervalued.
Finally, if your investments are not performing in line with your expectations then you need to consider carefully why this might be the case. You might not be managing them efficiently enough or you could be failing to close out loss-making positions before they do real damage to your portfolio. There is no shame in admitting your mistakes - after all nobody gets it right all the time - but the important thing is to ensure you learn from them.
