It’s time for another quarterly portfolio review. Overall, the performance of the portfolio has slowed considerably over the past three months and has become a little more volatile. I’m hoping this drop in performance is temporary, but there’s been a strong run since last summer and it might be unrealistic to expect that sort of performance to continue. I’m hoping extending my coverage to US and European stocks may provide some additional firepower.

For ease of reference, here is a link to my portfolio so you can see what’s in it at the moment. It’s actually a fantasy portfolio set up on Stockopedia to track my actual portfolio. The overall value is different (mine is worth £221k now) but I try to keep the proportions of each holding as accurate as possible so it can track my actual performance. The fantasy portfolio excludes dividends and tends to buy at slightly worse prices than me (because of the delay) so it somewhat underestimates the performance of my actual portfolio.

Performance

Benchmarks

The performance of my portfolio (QSS) is shown against its benchmarks in the table below (all the figures below exclude dividends).

To recap, my benchmarks are:

• The FTSE100
• The top ranking decile of stocks according to Stockranks
• A ‘buy and hold’ portfolio of all the shares on my portfolio and watchlist combined
• A mechanical portfolio which selects the best 25 shares from this list using my watchlist spreadsheet
• A more concentrated mechanical portfolio with the best 10 shares
• A ‘megacap‘ portfolio with my 10 favourite FTSE100 shares to buy and hold forever.

The last three months were not up to the portfolio’s previous performance, but were still ahead of the FTSE100 and the top Stockranks, so not too bad. However, over the three months my portfolio was outperformed by the buy and hold and the concentrated mechanical benchmark portfolios. This suggests that my selection of shares from the watchlist and timing of sales and purchases has not quite been up to scratch. I have felt a bit off with my timing in selling shares on occasion, not quite selling quickly enough to properly protect my paper profits but not slowly enough to ride out temporary dips. I feel I need to go one way or the other here.

Over longer periods my portfolio is still well ahead of most of the benchmarks. However, the concentrated mechanical benchmark portfolio is a couple of percentage points ahead  over six months. This benchmark portfolio invests in the ten top ranking shares from my watchlist so it invests in many of the same shares as my actual portfolio. The main difference is that this benchmark portfolio mechanically rebalances every month rather than being actively traded. Monthly rebalancing implies very high portfolio turnover and consequently high trading costs that I’m not capturing when measuring its performance. Taking this into account, I don’t think the fact that my portfolio is behind this benchmark means much. However, if the benchmark starts consistently beating my actual portfolio to a significant degree, this is a sign that there is something to improve. Ideally, if my trading is adding value, my portfolio should be ahead of the benchmark by some margin.

Trading stats

The table below shows my trading statistics. The key things to note are the win/loss ratio, which shows the proportion of profitable trades, and the gain/pain ratio which shows the size of an average win relative to an average loss. What I am aiming for in my momentum based strategy is to have a win loss ratio above 40% but to ensure the gain/pain ratio is as high as possible. I do this by cutting losers before they are more than 10% down and by holding and adding to winners.

My trading stats are still looking pretty good. They have deteriorated a little bit since last review but the last 50 trades are still well ahead of the previous 50, suggesting the direction of travel is still good.

Individual shares and overall strategy

The composition of my portfolio has changed quite a lot since last time, principally by the sale of a number of positions in some shares on weakening momentum and the addition of a number of US shares.

Looking back at individual trades, the following seems to have been happening quite often lately:

• I buy a share on a catalyst such as a breakout in price or good news
• It rises in price significantly, often by up to 30%, and I add to my position as it goes up.
• I sell when it falls again but because I leave this a bit long and I’ve been adding on the way up, I end up at around break even.

I think I might be doing one of two things wrong. If I want to make money on these shorter term trades, then I’m not scaling up quickly enough as the price rises (or I just shouldn’t scale up at all) and then not selling quickly enough when it falls again. Alternatively, I’m just trading too much and should give the share prices more room to oscillate and reveal their long term direction before selling.

Frankly I’m a bit torn here. On the one hand, I can see that more aggressive trading, e.g. using tight stop losses and scaling up more quickly, would be more profitable if I got it right. The ambitious part of me wants to do this. On the other hand, a large part of me is sceptical about becoming too much of a momentum trader and prefers to take a longer term ‘more sensible’ view. What I am more sure of, is that being caught between these two approaches  may be the worse of both worlds.

Having reflected on this a bit, for now I think I’m going to try to improve my trading further. I can always revert to the longer term approach if this doesn’t pan out. To improve I think I need to be a bit more agile, taking  larger initial positions (e.g. 5% of the portfolio) but scaling up less frequently (i.e. only if I am very confident). I think doing this will also make it easier to discipline myself to only go for the best opportunities. My default is still going to be to use tight stop losses and sell quickly if things don’t go to plan.