Keeping track of too many positions frequently results in time lost doing more important leisurely activities. Give the randomness and often volatile character of the financial markets, micro-managing positions, setting and adjusting stops repeatedly and searching for new positions via software tools or newsletters, is extra worth that is likely not a good use of time (but is certainly likely to drive up transaction costs and cause whipsawed results).
To build a respectable mix of diversified investments, consider strong companies each representing an industry “in favor” with the current economic trend. Characteristics to look for include consistent revenue and earnings growth, historical bias to upside earnings surprises, return on equity of 10% or higher, growth at a reasonable price (i.e. a PEG ratio, or Price Earnings-to-Growth Ratio, of 1.5 or less), and positive cashflow. These are simple factors that help define a quality company at a reasonable price.
So when the Baseline Analytics TrendFlex score is in “BUY” mode, hopefully you have built a list of such companies and kept them in your back pocket for the trend to support establishing a long position. Try not to hold more than 15 of such companies (10 would be better), and let them ride with the trend.
Should the TrendFlex Score turn to sell, don’t necessarily abandon these winners. Consider hedging with futures, selling calls to collect option premiums, reduce your holdings or protect them with index puts. All too often we have looked back at strong companies we sold too soon as they continued to move toward new highs. Take a longer-term perspective with these winning companies, but hedge your market exposure with other methods in the meantime when the trend turns negative.
Visit Baseline Analytics TrendFlex for Investment Rule #1.
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