trading your portfolio

Trading your portfolio can be a couple of things.  It can mean finding one or more stocks you own for the long term but that have periodic ups and downs.  You try to add to positions when they’re down, with the intention of selling the extra when prices are unusually high.  Or you can take a stock that is unusually volatile that you have little long-term interest in and try to buy at low points and sell at high.

Professional portfolio managers, with the possible exception of hedge fund managers whose main (only?) skill is trading, usually don’t trade their portfolios.

professionals don’t

How so?

–For a professional manager with, say, a $5 billion portfolio containing fifty positions, average position size is going to be $100 million.  There may not be enough daily trading volume in any given stock for short-term buying and selling to make a meaningful difference in overall results.

–I used to think that truly excellent trading, which I had through the trading room at my last job, could add 100 basis points to my portfolio return in a year.  Certainly no more, maybe less.  My job, on the other hand, was to try to add 300 basis points to the return on the index through good selection of sectors and individual stocks.  It made no sense for me to take my mind off 300 basis points–and risk losing them–when the highest payoff I might get for spending a lot of time on trading would be 1/3 of that.

–The skills are different.

–Pension clients actively dislike portfolio managers (again ex the hedge funds they irrationally adore) who trade a lot.  They monitor turnover ratios, that is, the annual dollar value of buying and selling activity as a percentage of total assets.  They simply won’t consider a new manager whose turnover is much higher than the average, not matter what the long-term record.  So successful trading is a good way to drive clients away.

you and me

None of that affects you and me, though.  And the stock market has been crazily volatile in recent times.  Why not try to take advantage of battling trading computers that are creating strange ups and downs?

No, this is not for everyone.  There are risks.  Still…

More tomorrow.