How’s your portfolio doing?

If your portfolio has not benefitted from the UK 100 ’s 17% rally off its lows, then we’ve got some useful tips and pointers to help you find out a) why this might be and b) how to remedy the situation. There are 5 simple questions you can ask yourself:

1. What returns am I looking to generate?
2. What’s the maximum I could comfortably lose?
3. How frequently do I trade?
4. What’s my time horizon?
5. Do I have the right broker supporting me?

Think about whether your current broker even cares about any of this before reading what we think when we address each in turn below. Note there is really just one concept that unites all of them, and that’s risk management.

1. What returns am I looking to generate?

With greater risk comes greater reward. Where do you place yourself on the scale? Those who benefitted from the strong rebound in commodities took a risk in entering the market where they did. This paid off handsomely, in accordance with the risk taken. Other, more defensive stocks – think pharmaceuticals or tobacco – might not have yielded as much over the same time frame, yet their shares carry less risk because demand for their products is seen to remain fairly constant and is not necessarily seasonal. Interestingly, it’s not the miners that have made fresh all-time highs in Q1, it’s the defensives.

So deciding how risk-hungry you are is a good first step. The financial markets are seen by many as a gambling opportunity and that’s fine, but are you a gambler? This naturally leads to the next question:

2. What’s the maximum I could comfortably lose?

While other brokers will come out with flippant remarks like ‘the smart trader cares about profits and profits alone,’ Accendo markets cares about its clients. As your broker, it’s in our interest that you stay in the game but concentrating on ‘profits and profits alone’ would be doing you a disservice.

“Only risk money you can afford to lose. You’ll be less emotional and more rational”

The experienced weigh up the potential risk AND reward involved in every trade before deciding whether to proceed. While there is nothing wrong with placing lots of trades with the aim of banking lots of small profits (it is a perfectly valid strategy) risking too much and taking too many costly losses along the way is best avoided. See our empowering educational piece on Risk vs Reward for more details.

When managing an investment portfolio, you must accept that not every decision will be a winner. In doing so, you must set limits at which you’re happy to put your hands up and walk away. Taking a loss of, say, 5% is more palatable than sitting on a position that’s down by 50% or more. Closing a bad position may deliver an acute sting from which you can easily recover. Staying in one can result in chronic pain that could dog you for a long time. Investing in stocks is a lesson in humility – take it!