We had a webinar last week for our Lifetime members and were inundated with questions. One question stood out because of its simplicity.

“How does a retired person manage a portfolio without taking too much risk?”

We receive many variations of this same question. Of course, we can’t give you any specific investment advice, but the TradeStops Investment Philosophy is a great place to start.

The TradeStops Investment Philosophy has been developed by Dr. Smith over several years. Its purpose is to present portfolio management rules that are easily understandable and simple for the individual investor to implement.

Here it is in eight simple steps. If you follow these steps, you’ll have the greatest opportunity to be a successful stock market investor.

  1. Start with great investment ideas.
  2. There are many newsletter writers with a long history of stockpicking success. This would be a great starting point. Even if you don’t have any newsletter subscriptions, you could set up Watch portfolios of the largest companies that make up each sector of the market. We recently created a video to show you how to set this up. You can access it here.

  3. Embrace uncertainty and risk.
  4. Think you’re going to achieve your goals investing in money market funds that are paying ¼ of 1% per year? Of course not. To become a successful investor, a person has to take risk. But there’s no need to take on outsized risk. Dr. Smith wrote about that here.

  5. Limit your downside.
  6. Use intelligent trailing stops! That’s the foundation of TradeStops. You can use trailing stops based on the Volatility Quotient (VQ) or the Stock State Indicators (SSI). The TradeStops Knowledge Base has the answers for you in this article.

  7. Un-limit your upside.
  8. Trailing stops don’t just help you limit your downside, they can help you un-limit your upside. Have you ever sold a stock after a 30% gain, 50% gain, or even a 100% gain because you thought that there were no more gains possible? Using the TradeStops volatility-based trailing stops can help you stay in a stock for as long as that stock continues to move higher, even years at a time. You can see that here with STZ.

  9. Invest enough so you can sleep at night.
  10. Don’t take too much risk in any one position. That’s the entire purpose of the TradeStops Risk Rebalancer. Take the same amount of risk in your conservative stocks as you do with your risky stocks. Using this technique will allow you to sleep at night knowing that one position or two won’t blow up your portfolio.

  11. Buy what’s already going up.
  12. This seems so simple, but you’d be surprised at how many people try to time the exact bottom of a stock (commonly known as trying to catch a falling knife). It can’t be done. We don’t try. We want to invest in a stock that has moved higher and is poised to continue its long-term move up. We call it Going Green.

  13. Concentrate your portfolio.
  14. This is a simple concept, but can be difficult for many investors. We believe that the average investor can easily manage a portfolio of around 20 stocks. Managing less allows each position to have a greater influence on the overall portfolio. With more than 20 stocks, you run the risk of not having any of your stocks positively affect your portfolio to the upside. Dr. Smith began a discussion of this topic last week. Look for another article tomorrow

  15. Pay attention to your overall portfolio risk.
  16. Use the TradeStops portfolio tools to help you assess the risk that you’re taking. This includes the Asset Allocation tool and understanding the Portfolio Volatility Quotient. In the example here, the vast majority of the stocks are high-risk and medium-risk, yet the overall volatility of the portfolio is low-risk. This is accomplished by having a well-diversified portfolio. The Asset Allocation tool shows you that the portfolio is not over-weighted in any one sector or industry.

Following the rules of the TradeStops Investment Philosophy can help any investor, retired or still working, achieve long-term success in the stock markets.

Tom Meyer
Education Director, TradeStops