Portfolio management is the cornerstone of effective stock trading. It’s not just about picking the best stocks—it’s about strategically organizing them in your portfolio to maximize growth and minimize risk. This lesson will teach you how to categorize and prioritize your trades based on their potential, risk, and stage in the market cycle. By the end, you’ll know how to manage your portfolio like a pro, ensuring you’re always prepared for changing market conditions.

The Portfolio Framework

• Top Idea:
  • Characteristics: The most promising stocks in your portfolio. These are backed by strong themes, excellent relative strength, and a breakout from a significant base.
  • Examples: Stocks like Nvidia or Tesla, which are highly liquid and institutionally backed.
  • Strategy: These are your largest positions. Protect them by monitoring overall exposure to avoid overcommitting and putting these at risk.
• Conviction Core:
  • Characteristics: A tier below top ideas but still strong. They share most characteristics with top ideas but lack some defining quality.
  • Examples: Stocks like Roku or Square from previous years.
  • Strategy: Slightly smaller positions than top ideas, but still critical to your portfolio.
• Volatile Conviction Core:
  • Characteristics: High-potential stocks with added volatility. Often less liquid or higher spreads, requiring smaller position sizes to manage risk.
  • Examples: Stocks like SI (Silvergate Capital) or PubMatic.
  • Strategy: Reduce position sizes due to higher volatility but treat them with similar diligence as conviction core stocks.
• Core:
  • Characteristics: Strong, second-tier stocks. Often lagging behind top ideas in terms of breakout timing or relative strength.
  • Examples: Stocks like Snap or Cloudflare, which might lack the immediate appeal of top ideas but are still solid investments.
  • Strategy: These make up the smaller positions in your portfolio, typically the sixth to eighth stocks in your account.
• Swing Positions:
  • Characteristics: Short-term trades designed to capitalize on quick market opportunities later in the cycle.
  • Examples: Stocks breaking out from short pullbacks or bull flags rather than large bases.
  • Strategy: Treat these as three-to-five-day trades, focusing on quick profits while minimizing exposure to pullbacks.

Capital Allocation by Category

• Allocate capital based on potential and risk:
  • Top Ideas: Largest allocation (15–35% of portfolio).
  • Conviction Core: Moderate allocation (10–20%).
  • Volatile Conviction Core: Smaller allocation (5–10%) to manage risk.
  • Core: Moderate allocation (7.5–12.5%).
  • Swing Positions: Smallest allocation (5–7.5%) for short-term opportunities.

Adapting to Market Cycles

• Early Cycle: Focus on accumulating top ideas and conviction core stocks as they break out from significant bases.
• Later Cycle: Reduce exposure to core stocks and focus on swing trades to optimize short-term gains without holding through pullbacks.

Examples and Case Studies