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Let's say in 2024, you want to make your portfolio the best you have ever had and reduce stress and anxiety over your investments. How do you go about it?
Common portfolio management advice includes diversification, rebalancing, and things of that sort. You've probably heard of them too many times. I don't want to repeat them here. I want to go through the steps no one talks about. These steps and tips are based on what I have learned in two decades of investing in the stock market and studying the best investors such as Warren Buffett, the late Charlie Munger, Howard Marks, and Peter Lynch. They can truly level up your portfolio in 2024.
Follow along and decide which step to apply to your portfolio.
Let's talk about them!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with past blog posts on How to Invest Like Buffett? How to Invest Like Charlie Munger, or how to Find the Highest-Returning Stocks?
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Step 1: Know Your Real Investment Return
I know you can look at your portfolio in whatever brokerage app you use to invest and know your investment return. However, there are a few problems with those portfolio returns.
Most brokerage applications do not keep and count your sold positions in your total return if you withdraw the money. Once you sell a position and withdraw the money, winner or loser, it will no longer include that transaction in your total return. Moreover, if you have more than one brokerage, with your retirement account in one app and your stock investment in several apps such as Robinhood, Webull, or others, getting your real investment return over the years is almost impossible.
If you do not track your buy and sell decisions in a central place, outside your brokerage apps, it is very possible that you are losing money in the the market and don't even know it.
As they say, what gets measured gets managed. If you don't measure your real return including everything you've sold to take profit off or panic sold a position because the price was going down, you never know what your actual rate of return is over the entire year and across several years. You can't manage your portfolio effectively.
In 2024, before starting a new portfolio or adding and removing things to your current portfolio, create a central place to put all your buy and sell decisions and calculate your real return, including what you've sold.
Sticking to this process year-over-year is important too because you may lose money in one year, but you want to ensure you can recoup the losses in the next few years. You want to set the foundation correctly to calculate your total return across all your investments and over the years.
How to do this? Start a Google Sheet, and record it every time you decide to buy or sell. There are obviously apps, too. For example, my company, Stock Card, has a portfolio feature built exactly for that purpose; it's free, and I use it myself, but it requires you to enter your trades manually. You can also use portfolio tracker apps like Sharesight or Kubera and pay a small fee to have everything in one place. Without knowing what you are doing, there is really no way to plan to improve things.
Step 2: Compare Your Return With the S&P500 Index.
So, why do you invest? Most of us want to make money. And I know some of you are investing because it is fun and you enjoy the process. That's all good. I love the process of investing and quite enjoy it, too. But, if you think about it logically, you put time and effort into researching stocks and ETFs. Even those who like to follow the news and social media as their only way of researching stocks spend at least 20-30 minutes per investment to read the news and research online. So, if your effort makes less money than the alternative of sitting on your hands and investing in S&P500 or high-interest government bonds, you have to ask yourself why you are doing it. Every logical person has to be honest with themselves and agree with the logic. If you put time and effort into something, you should get a higher return than the alternative of not doing anything.
This is very easy to do if you ask me, especially if you already have a central place to track your performance in the previous step. Write down the value of the S&P500 Index ETF on the day you buy anything. Calculate the return for that alternative investment the same way you calculate your actual investment return, and see if your individual decision and your portfolio, in general, are overperforming the market.
If you don't want to do this for all of your portfolio because it takes time, do it for the top 10 holdings and see the results. If your top 10 holdings are overperforming, you are all right. On the other hand, if even your top 10 holdings are underperforming the S&P 500, you have to ask yourself what is going wrong with your portfolio and stock-picking approach.
Step 3: Identify How Many Stocks You Should Own
Some of you know and follow my real-money portfolio on Stock Card. Judging by an average return of roughly 400% for all of my investment decisions since 2014, it's a good portfolio, beating the S&P 500 average return nicely in the same period. I am also emotionally attached to this portfolio because I've used it to fund building our company, Stock Card, and pay the down payment for our house. So, overall, it's not a bad portfolio. But, it has started to stress me out to the point that I have stopped investing in individual stocks in the portfolio for a while and just kept up with our automated index investing through our 401K account that isn't included in my portfolio on Stock Card. Why does my portfolio stress me? There are over 100 stocks and ETFs in it. I find myself wide awake at night thinking about some of the stocks and ETFs in the portfolio that I haven't dug into for a long time, and I spend a lot of time researching stocks and ETFs every day because of my work.
The more stocks and ETFs you have in your portfolio, the more time you need to track them. Even a technology-savvy individual who uses good research platforms to do research better and faster can't keep up with 100s of stocks and ETFs.
Some of you have heard about big-name investors like Peter Lynch who had more than a thousand stocks in his market-beating Magellan fund for over a decade. Honestly, that was my model back in 2014, but Peter had a team of analysts supporting him. Recently, in a book written by Peter Lynch's prodigy, Joel Tillinghast, I learned Peter was maniacal about getting his research done through his team of analysts. So, the amount of stuff in your portfolio has to be proportionate to the time it takes to research and keep up with them. Even if you are a long-term holder like me, you have to check in with companies in your portfolio roughly once a year to ensure there is no fraud in the worst-case scenario or whether there are opportunities to add more in the best-case scenario.
Applying this step is rather easy. Do a quick mental math and see how much time you have each month to research stocks, and divide that by the average time you allocate to research a stock or an ETF to see how many stocks or ETFs you can research per month. Multiply that by 12 for 12 months, and this number is a good indication of how many stocks and funds you should hold in your portfolio.
Let's do the math for me.
I have about 2 hours per day to research stocks and ETFs, which gives me about 40 hours per month allocated to stock market research. Remember that researching is part of my work if that seems a lot. Then, historically, I need about 5 hours of high-quality research to make a buy or sell decision. So, my 40 hours per month gives me about eight stocks to research each month, and that's about 100 stocks researched properly each year, 8X12. But then, you don't buy or sell every stock you research. Even if I invest in 20% of the stocks and ETFs I research, my portfolio can't be more than 20 stocks.
You should do a similar rough calculation to figure out how many stocks you must buy or sell each year. The more time you have available to research and check in with the holdings in your portfolio roughly once a year the more stocks and ETFs you can have in your portfolio.
There is a real advantage in setting up your portfolio according to the three steps we discussed today:
Following today's three steps will definitely set the foundation to elevate your portfolio in 2024. A good portfolio management process allows you to generate higher returns and reduce stress and anxiety.
Next week, on the show, we will stay on the topic of leveling up your portfolio, and I will share how to reduce risk in your portfolio.
I'll see you in part 2!
NEW COURSE IN 2024