Investing Information

Investing & Online Stock & Share Trading: Money & Risk Management - Atkinson Portfolio Planner (1)

This article was originally featured in Daryl Guppy's 'Tutorials in Applied Technical Analysis', voted no 1 trading newsletter in Australia by Shares magazine & no 4 in the world by US Stocks & Commodities magazine and is reprinted here with Daryl's permission.

In addition to developing sound technical analysis skills, strong trading psychology coupled with well thought-out money and risk management are also vital key secrets for success when trading or investing in the market.

From real life experience and lessons in portfolio management learnt the very hard way, John Atkinson originally designed his series of three Money and Risk Management spreadsheets to help his own trading. Through the help of programmers Stephen Parsons and Peter Tamsett, he recently added several user friendly macros and has now made them available as simple to use and very affordable tools to help traders and investors plan and manage their portfolios.

They are designed to assist in the planning and developing of profitable portfolio growth, by putting structured money & risk management control in place and as a means of keeping simple and accurate records.

Many investors and traders spend less time planning the risk of individual trades and their overall portfolio for their wealth creation than they do planning their grocery shopping. Many do not plan, accurately track or review their progress at all.

Some think that spreading or 'diversifying' their portfolio into several large positions in 'safe' blue chips is their way to address money & risk management. They do not realise that overloading in too many positions or too large a position can put their portfolio seriously at risk.

Without proper planning one may end up with a portfolio that is a disaster waiting to happen. We know. We've been there & we wouldn't want you to go through the sleepless nights and gut wrenching fear, financial and emotional loss that we and a few traders we know have experienced as a result.

A major reason why we lost our Sydney waterfront home in 2000 and more since was not developing or adhering to correct risk & money management rules - so our series of three portfolio tools has been created from our own personal very hard knock experience at a very real financial cost of literally hundreds of thousands of dollars and at a huge emotional cost.

We subsequently went looking for the information which we wish we'd looked for, or had been advised of, prior. These tools are based on various 'world's best practice' principles and strategies taught by this newsletter, Daryl Guppy's books and by other trader authors such as Alan Hull, Louise Bedford, Dr Alexander Elder and Dr Van Tharp.

They consist of the:

? Atkinson Portfolio Planner - to plan your stock selection & overall sector & portfolio risk in advance

? Atkinson Trade Optimizer - which stock to buy when you have a few to choose from & funds only available for one?

? Atkinson Portfolio Manager - stop loss, targets, individual stock & combined portfolio equity curves, expectancy of closed trades and much more

Over the coming weeks we will discuss each of these tools in detail.

We start this week with the Atkinson Portfolio Planner .

This tool is designed to help you plan your portfolio correctly so you can sleep at night, knowing you have a balanced portfolio and are not too exposed in any one trade, volatility grouping or sector.

Also, that you have planned the correct number and size of open positions to ensure that your total portfolio risk does not exceed your specified criteria.

This easy-to-use tool allows you to check your planned allocation of:

Mix of high, medium and low volatility shares

Mix of shares between sectors

Individual risk of each position as a % of your portfolio

Maximum % of your portfolio in any one position

Total risk of your combined portfolio

Once you have entered your requirements, the Atkinson Portfolio Planner will calculate the above essential factors and even flag red alerts if any of your planned or open positions exceed your personal risk profile.

This allows the user to ensure in the planning stages that your hard earned capital will be apportioned correctly to conform to risk levels selected by your own Trading Plan.

It is the responsibility of the user to research and select the criteria to be applied for his/her Trading Plan and as key input to the Portfolio Planner e.g. volatility and sector allocation, stop loss levels and % risk factors; and for the ultimate selection of which stock(s) to buy and the applicable position size(s).

Putting all or most of your available funds into one stock or sector; placing at risk a large % of one's portfolio in any one position or having too many open positions with an unacceptable total % of portfolio at risk are recipes for potential disaster.

Experience of other traders shows that it is also wise to diversify their capital in a chosen proportion between a range of high, medium and low volatility stocks to maximise annual growth of their portfolio.

Experienced traders and investors have varying rules for money and risk management.

The following are some typical examples from the literature:

1. In his books and this newsletter Daryl Guppy chooses 1/7 (14.3%) in high volatility (e.g. 'speculatives'); 2/7 (28.6%) in medium volatility (e.g. 'mid caps') and 4/7 (57.1%) in low volatility (e.g. 'blue chips'). Others may choose a maximum of 10% in high volatility. The final choice is the user's responsibility

2. For small portfolios, in his book Share Trading #, Daryl Guppy provides an example of building from $6k to $21k, by starting with $2k (i.e. 1/3rd) in high volatility and $4k (i.e. 2/3rd) in low volatility stocks; then splitting this back to 1/7; 2/7 and 4/7 when the portfolio has grown to $14k.

3. Maximum position size as a % of total portfolio: commonly 20-25% absolute max; some reduce to 15% or less for large portfolios or speculative stocks.

4. Maximum Equity Risk: No more than 2% of portfolio to be placed at risk in any one trade - some choose to reduce this 1 % or 0.5% for larger portfolios or for more highly volatile positions.

5. In my book '10 Ways Not to Lose Your Home in the Stock Market' (due 2005) I wrote "What we also failed to realise was that instead of spreading our risk, we were magnifying our risk. For instance, using a stop loss of 2% portfolio risk, let's say a trader has ten positions. That means if the market takes a sudden dive and all stops are triggered, they risk losing 20% of their entire portfolio value. Expand that out to twenty positions, then 20 x 2% = 40% of their portfolio is at risk. It can happen - it did happen. If you freeze or have margin loans, the destruction can be far worse?.

Dr Elder refers to the 2% risk rule as protection against shark attack and extends the concept further to a 6% rule to protect against piranha attack i.e. to close out the whole portfolio if it drops by 6% in the past month.

Taking this to its logical extension, Dr Elder describes how, using this strategy, also limits traders to three positions (at 2% risk) to start off with, until some of them rise into profit, before opening any additional positions."

(Readers may wish to refer to my Home Study course module on Money & Risk Management which is based on and includes Daryl Guppy's Share Trading & Better Trading books and includes my portfolio tools - available at our site. Also refer to books by Louise Bedford (e.g.Trading Secrets) and Dr Alexander Elder (e.g. Come into my Trading Room) for further explanation.)

In the next article I discuss how we use the Atkinson Portfolio Planner to ensure that the following planned risk and money management criteria are met:

1. The maximum total value spent in each volatility grouping

2. The maximum total value spent in any sector

3. The maximum position size as a % of total portfolio

4. The equity risk for each position

5. The combined total portfolio risk exposure includes the Investing Online Newsletter , launching 2 July 2005 to teach online investors how to find, select & manage which stocks or shares to buy; money & risk management; importantly when to sell; traders' & investors' experiences; psychology, fundamental & technical analysis, articles from leading authors;& a DFS Equities portfolio to track weekly performance of sample selections. The first editions of the Investing Online Newsletter will also cover how you can draw up your own investment or trading plan.

Also at

* Jim Berg's Trading Strategies with Metastock Home Study Course with one month's email support from Jim Berg

*New Ebook of articles written by John Atkinson for Daryl Guppy's newsletter'The Atkinson-Guppy Articles'

* Stock & Share Market Home Study Courses on the work of Jim Berg, Daryl Guppy, Alan Hull, Simon Sherwood & Van Tharp

* Money & Risk Management Portfolio Tools

* A FREE exclusive online trading & investing stock market club with access to FREE downloads


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