Building & Managing Your Portfolio Checklist

This article applies to the “position trading” or long-term portion of your portfolio. Swing trading should be segregated out as a separate portion of your strategy and not exceed 20% of your overall invested assets.

1. Decide On Your Strategic Asset Allocation

Strategic asset allocation is the term given to the asset allocation that you trend towards. It’s used for rebalancing.

Let’s say you decide to be 80% equity and 20% fixed income over time. That is your strategic asset allocation. You will not be there all of the time. Market conditions can change your asset allocation based on shorter term tactical decisions that you make.

For example, after a very strong bull market, you might sell equities to take profits and drop down to 50% equities short-term and 50% cash or fixed income.

Or, after a bear market, you might jump up to 99% equities and only gradually raise cash via dividends and options premiums until, once again, there is a bull market peak happening which causes you to go back to being a seller who is accumulating cash, as in example one.

My long-term strategic asset allocation is 80% equities and 20% alternatives. I use no fixed income other than the cash I hold short-term. Why? Right now interest rates are too low to interest me and I don’t expect that to change in a long time. I employ my investment barbell:

2. Build Your Core Portfolio

The core part of your portfolio should contain exposure to large cap stocks that track the economy. Why? Over time that gives you growth that beats inflation and that’s where people mindlessly pump money through their retirement plans.

QQQ (QQQ) which is based on the Nasdaq 100 and The Next Gen QQQ (QQQJ) which are the next 100 biggest stocks on Nasdaq are many folks core ETFs. Having 10-15% of your portfolio in each of those funds permanently is a great start.

I don’t use the S&P 500 indexes because of all the “zombie” stocks packed in there.

3. Build The Rest Of Your Portfolio Over Time

It might seem weird that only about a quarter to a third of your portfolio is core, but, that is precisely how very successful hedge funds, family offices and other institutional investors manage money.

Of the money you will invest that is not core, you will have to decide how to allocate it among ETFs and stocks. That is a very fluid and tactical thing.

In general, when you just get started, I suggest using mostly ETFs, then adding maybe a dozen stocks over a year or two.

If you are a more seasoned investor, you can jump right into 20-30 stock portfolio representing anywhere from 25-75% of your overall portfolio.

I use one of three approaches to modeling asset allocation: 

  • ETF Only – This is basically the Global Trends ETF portfolio. It works to find and capture macro opportunities.
    1. QQQ & QQQJ
    2. Select a basket of ETFs from our Quarterly Plug & Play ETFs to scale into.
  • ETF + Stocks – Here I do a half and half and half approach. What does that mean. I split the portfolio into half ETFs and half stocks.
    1. Half ETFs with QQQ & QQQJ as core holdings and the rest from Plug & Play ETF lists.
    2. Using our Plug & Play stocks list, build up to a dozen stocks over a year or two if you are a newer investor. Or, if you are a seasoned investor, build a 20-30 stock portfolio.

4. Decide Whether Or Not To Sell Options

Again, this applies to position traders, not swing traders. Here, we are focused on option selling for adding extra income and mitigating risk for retirees and near retirees.

If you are an active option seller, then 20-40% of your portfolio will regularly be in cash which holds cash-secured puts. This is a great strategy when combined with covered calls to add around 5-10% of additional income to your portfolio each year when done conservatively. The kicker is that it also reduces equity risk by 10-20% per year.

5. Building & Managing A Position

You will need an understanding of technical basics and our buy zones here, so make sure to read:

Technical Trading Basics & Buy Zones

The key to buying stocks and ETFs is the old “buy low” and “sell high” idea.

There are two considerations here.

  • Valuation
  • Price Trend

Valuation is from knowing the companies and industries you invest in. Various fundamental analysis will give you a good perspective on what companies should roughly be trading at intermediate term (2-5 years).

Valuation is your first consideration.

Price Trend takes into account the sentiment of the market. We use overbought and oversold signals to let us know when the market overheats or overcools something. Typically, we look at the weekly RSI (Relative Strength Index) and other indicators to let us know when a stock is close to the bottom or top of its 6-12 month range.

  • When ETFs or stocks get a reading of 70 or higher on the weekly RSI, that is a signal to strongly consider scaling out of the position at least partially.
  • When ETFs or stocks get a reading of 30 or below on the weekly RSI, that is a signal to strongly consider scaling into a position in a security.

For buying, ideally we want to see under valued and under bought. That usually only happens on large corrections or bear markets.

So, we have to buy on the way up usually. In those cases, we will see an in between number on the weekly charts. We will make our buys then for scaling in when the daily RSI gets to around 30 then.

That is, we use the shorter-term time frame to buy a rising trend that is not yet overbought and presumably if our fundamental analysis is good overvalued either.

This is useful for people who join us after we have already established a position and want to catch up, or for when we miss a bottom and still want to get in on an investment we like.

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