Diversify with groups

Having a watch group, or better yet a few different groups, is essential to successful investing.  With a pre-selected universe of stocks, mutual Funds, or ETFs it is easier to pick the best positions, the best stocks, to invest in at any given point in time.

There are two things that investors must determine about groups or multiple groups in order to get started:

  • What kind of groups they want
  • What makes u the group contents

Remembering the concept of diversification, it is a good idea to have a variety of groups.  I usually have seven or eight groups that I watch and invest with all the time.  Typical groups may be composed of stocks, mutual funds, or ETFs.  Here are a few examples:

  • Sector
  • Domestic
  • Asset
  • Bond
  • Large Cap
  • IBD 50
  • Mid Cap
  • An Author’s Top Picks
  • Small Cap
  • Emerging
  • High Dividend
  • Conservative
  • Foreign
  • High Growth

Diversify with Groups. Once you have your groups you can develop strategies for picking the best investments within each group.  Actually, you should have two or three strategies for each group so you can invest safely and profitably based on current market conditions.

  • Long-term Holdings
  • Short-term Holdings
  • Mid- or Flexible-term Trading

Keep focused based on your personality: Just because you may only be 34 years old doesn’t mean that you must follow conventional wisdom and invest primarily in stocks. Put your money where you feel comfortable. This may mean you want to limit risk instead of being daring with your investments. You may feel that you have time to build your wealth and retirement accounts and you’re willing to let it build slowly. If this is the case, then investing with ETFs, mutual funds, or some long-established stocks may be the best way to go.

On the other hand, if you are willing to take a few risks or diversify your portfolio a bit more, you should look to stock groups that offer greater potential for fast growth.

You can elect to use any or all of these types of investments by setting the strategy buy/sell rules-those that will help meet your objectives and compliment your personality. With the right investment software you can perform back tests on your groups to see if the results are the type you want-if not, you can tweak your strategies to get the results that work best for you.

The challenge with watch groups is how to create them, how big they should be, and how many stocks each group should include. While there are no precise rules for creating a universe of stocks, there are some good guidelines that can be coupled with common sense.

Size – a group that is too large becomes unwieldy and more difficult to analyze and find the rising stars. I try to keep my groups to fewer than 130 ticker symbols. In fact the majority of my groups range between 40-70 symbols and a few groups range between 12-15 symbols.

Duplication – I try to avoid stocks, mutual funds, or ETFS that are similar in natural to others in the same group.

Creating the actual list of mutual funds (of stocks, or ETFs) in a group can be done in one of two ways:

  • Homework: The homework approach is using a screening program from your broker or another source to find and whittle down the best prospects.
  • Copy a List: Take a list that has already been published by another source. In other words, let someone else do the “homework”. Over half of my groups were created this way using sources like: Investor’s Business Daily, Books, and Magazines – Annual Picks.

Of course, if you are managing your own IRA, 401k, or TSP then your choices, the content of your group, may have already been determined. Still, you may need to refine your group by steering clear of duplicate positions by subdividing your investments into two or more groups so you maintain true diversity.

An important aspect in creating a group is to remember the purpose is NOT to find a winning position, but rather to find potential winners, e.g. high-dividend ETFs; or in some cases to simply group together opposites that may rise and fall as the economy or events dictate, e.g. sector funds.

With a diversity of groups you will be in a great position to invest in the best performers. Of course you will find the best performers from each group by doing your homework. Dominick is the designer of the investment program

Dynamic Investor Pro, an investment software used by individual investors and professional investment advisors for stocks, ETFs or mutual funds.



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