• Portfolio Strategy - You need to decide if you are an investor or a trader? If you are more the conservative type investor or have a longer-term outlook, then you may consider the buy and hold strategy to investing on the share market.

• Buy and hold strategy - The objective is to develop your investment portfolio and only make adjustments when absolutely necessary. This strategy is often the most sensible and least risky strategy to choose. The medium to long term buy and hold strategy will almost always outpace inflation.

What is Portfolio Management?Portfolio management is important as it means getting the maximum

from one's share investments. Remember, you main goal is to maximize wealth by maximizing returns (i.e. portfolio strategies) and

to minimize risk (portfolio management).

• Swing Trading Strategy - This is a more leisurely version of jobbing, where the objective is to climb in at the bottom and jump off at the top. Timing is the critical success factor.

• Jobbing Strategy - Jobbing is enjoyed by bold speculators who seek excitement. It is a process of jumping in and out of shares and taking advantage of very small price movements. Jobbing requires an active ear to the ground, an in-depth knowledge of the share market and takes up more time. Here you have to be careful from a tax point of view as you may classified as a share dealer and be taxed accordingly.

If you are more the aggressive-type investor or have a muchShorter term outlook, then you may consider the swing

trading strategy or even shorter jobbing strategy.

• People invest in the share market because of the potential for high returns, but this comes at a price. This price is the higher risk associated with share market investments compared with, for example a fixed deposit with a bank. To reduce risk, one basic principle of portfolio management is diversification.

• Diversification means to spread your capital among different shares and industries. By doing this, one reduces the risk of losing money if things should go wrong with a particular share or shares. "Concentrate" one's portfolio by carefully choosing between 6 and 12 shares across 3 to 5 sectors.

• Portfolio structuring is similar to diversification, but instead of spreading holdings across market sectors, you diversify your portfolio in terms of quality and time frame. The classic traditional portfolio consists of a well-balanced selection of "blue- chip" shares that are held indefinitely. This tends to minimize risk, but does not allow for exceptional returns. Portfolio structuring attempts to improve the return on a portfolio without increasing the risk.

• The typical structured portfolio should have the following:

• 50-70% would remain in blue-chip shares (i.e. Top 40 shares) with a long-term view.

• 20-40% would be placed in growth shares (i.e. Mid Cap shares) with a medium-term view.

• 10-30% would be used for active trading in speculative shares (i.e. Small Cap shares or warrants) with a very short-term view (i.e. maximum 3-months).

• The biggest enemy in the share market is human emotion (i.e. greed & fear). • The biggest challenge to you, as an investor, is to remain objective. • One way to eliminate human emotion is to apply a stop loss strategy. • Just as a seatbelt is there to protect you in your car in the event of an accident, so

does the stop loss strategy attempt to protect you, the investor, from the unexpected.

• When it comes to successful share market investment, it is not so much a story of capital gains that is important, but rather one of avoiding capital losses.

• The major function of a stop loss strategy is to limit your losses to a pre-determined amount. This is an essential tool for traders, speculators or short-term investors.

• Most successful long-term investors snub the use of stop loss strategies, as they rather limit their downside risk by proper diversification, hedging and detailed fundamental research.

• However, traders normally lack any wide diversification, as well as detailed fundamental research and therefore need some other method of safeguarding their capital.

• A successful trader has to have an extremely strict selling discipline.

• A long-term investor can be right at the wrong time if he has patience. • A trader who is right at the wrong time, however, is not a trader for very long.• Traders that see a share fall and then decide to hang on to the share, pretty soon

lose their capital. • A good trader is an opportunist who risks his capital with the object of making a

large profit within a small period of time. • If the position turns against him he should cut his losses or take his profits

immediately and move onto to another position. • He can not afford to base his future on the vague hope that he will be proven

right and the share will recover at some later stage. A trader can not afford to have his capital locked into a position that is not working for him, this capital should reallocated to a more profitable position.

• A stop loss strategy automatically fulfils this function. • After buying a share the trader should determine the loss he is prepared to take

(normally between 10-20%) and immediately place a stop loss order. For example if he decides the maximum loss he is willing to accept is 10%, and then buys a share at 1000cps, then he should place a stop loss order to sell if the price is smaller or equal to 900cps. If the share price now falls to 900cps or below, the trader should immediately give an order to sell the shares at the specified price. Depending on the liquidity of the share he should then have sold out at a 10% loss.

• Another and actually better method is to place an automated trailing stop loss order at say 10%.

• This means that as with the above example if the share drops by 10% an order will be placed to sell out at 900c.

• In addition, if the share increased to 1500cps, the stop loss will automatically trail the share price and the new stop loss order will be at 1350cps (10% or 150c below the current share price of 1500cps).

• When the share now drops 10% from its high, a sell order will automatically be generated at the new stop loss of 1350cps.

The same applies when the share price has moved higher to 2000cps. The stop loss order will trigger when it reaches 1800cps. In this

manner the trader is able not only to limit his losses but also to lock in profits. This is a strategy that every trader should consider to

ensure his longevity in a sometimes very volatile market.

• Have you established whether you are a conservative investor or an aggressive trader?

• Have you decided to use the Buy and Hold Strategy if you are a conservative investor?

• As a conservative investor, have you established the portfolio structure along the lines of good quality blue chip shares with a long-term view?

• As a conservative investor, have you established the portfolio diversification along the lines of different industries and different sectors?

• As a conservative investor, have you decided upon what factors would cause you to sell your long-term buy and hold shares?

• As an aggressive trader, have you decided whether you would use the Swing Trading Strategy and/or the Jobbing Strategy?

• As an aggressive trader, have you established the portfolio diversification along the lines of different industries and different sectors?

• As an aggressive trader, have you decided on the portfolio stop loss strategy?

Step #4 would have provided you with knowledge on how to build a diverse portfolio whilst managing your risks.

Essentially all of these steps together form the foundation for any good investment strategy. The more you are able to apply and put into practice using these investment

methods you will be able to make more informed trading decisions. Ultimately, the more time you spend on mastering these steps the more likely you are to be successful

and profitable in your wealth creation endeavors.

• There are four steps to choosing your first shares, namely:

1. Narrow down the choice; 2. Gather information; 3. Get your timing right; and 4. Build a balanced portfolio

• There are four methods to use when prospecting for interesting-looking shares, namely; Top-Down Method, Using Financial Journalism, Using Fundamental Analysis and Using Technical Analysis.

• The two most important factors to watch when it comes to the "big economic picture" are: Inflation rates; and Interest rates.

• There are many financial ratios, but the most important ones are: HEPS Growth %, Turnover Growth %, Operating Margin %, Interest Cover, Effective Tax Rate %, ROE %, Debt/Equity ratio, Cash/EPS and ROC%.

• Some basic technical analysis includes: Trends and Cycles analysis; the use of Price Charts (Closing Line Chart and Bar Charts) and technical analysis indicators such as Moving Averages (21 & 40-day Simple Moving Average crossovers), the OB/OS indicator, the Momentum indicator, the RSI indicator, the Slow Stochastic indicator, the MACD indicator and the Volume Indicators such as the OBV and VPT indicators as well as the Relative Strength indicator.

• There are three ways to invest using portfolio strategies, namely: Buy and Hold, Swing Trading and Jobbing.

• There are three ways to manage the risk in a portfolio, namely: Diversification, Portfolio Structuring and Stop loss Strategy

We would really appreciate any feedback with regards the general format of

this tutorial. Please send your comments to: shaunvdb@psgonline.co.za

Thank you for your support and happy share trading!

Shaun van den Berg

Head of Investor Education / Technical Analyst

PSG Online