Maximum Portfolio Composition and Cash Reserve

In two decades of investing and trading equities, through chatting with the best traders, there is no set parameter on the optimum portfolio. While many traders have the innate ability to go from 100% cash to 100% invested within minutes, I've found that the personal risk tolerance of the individual greatly determines how much of a potential return one can make in a given year.

In my early years, I held 15-20 equity positions at a given time. During the late 1980's and 1990's, I followed the Peter Lynch ideals of an industry bet where I would cherry pick the top performing companies of a given sector. It wasn't unheard for me to have exposure in only three sectors but have three to seven stocks in each sector.

Because I'm not as sharp as my younger days, today I've found I can only hold a maximum of 12 equity positions given all of the charts I review on a nightly basis. The good news is there is no dollar size maximum I impose on any position. I have it planned to purchase a stock four separate times should it move in the intended direction. For some reason, I always seem to holdback around $10-20k in cash regardless if its a uptrending or downtrending market. I'm not sure if its a subconscious decision of needing a new car at some point or whether I'm still working on unlearning some of the wrong lessons learned in business school.

The things I want to work on for 2008 is whether I can expand new pyramid trades by going from four to five, then to a maximum of seven purchases. Now in late 2006, I got in some trouble with this method because the trades wouldn't last beyond the fourth purchase.

In the most recent buying opportunity in August, I went to my maximum four purchases at progressively higher prices on five different equities. The major difference was the buy points were well below the 52 week high, set just a few weeks earlier. I was lucky that the market resumed their uptrend and that the blip down was caused by a few hedge funds liquidating their long positions to meet margin calls.

While I do get shaken out of a 100 shares here and there when a stock prematurely trips a stop, The goal is to keep at least 80% of the portfolio invested with the current trend of the market. Updating your stop loss points nightly on every position, will ensure you won't make a panic trade when the markets move contrary to your portfolio.