What do you do after you buy a stock? Do you keep an eye on the position day in and day out until it’s time to sell? Or are you like most people, neglecting the stock along with the rest of your portfolio?

Typically, investors spend too much time focusing on whether or not they should buy, and then move onto the next stock. Monitoring open positions is an afterthought. At best, most people only review their holdings once a quarter when earnings come out – but that’s a big mistake. You can significantly reduce the risks in your portfolio in just a few minutes…

Today, I want to show you how you can avoid major losses by using a “5-Minute Portfolio Review” just once a month.

Obviously, this is directed at long-term investors – or even traders who own long-term, buy-and-hold investments in 401Ks, IRAs, or brokerage accounts.

That’s right, even buy-and-hold investors can benefit by adding some technical analysis to their investment process!

The goal of the 5-Minute portfolio review is simple: you’re taking a few minutes to take a look at the technical conditions of a stock. Why bother? In general, firms only give their shareholders four meaningful updates each year – one look at earnings each quarter. But because technical analysis focuses on price, it helps to fill in the gaps on a real-time basis. In other words, technicals give you a constant stream of information about your holdings.

When you conduct your own monthly 5-Minute portfolio review, you’re essentially just trying to identify your winners and losers. That way, if you own a stock that looks like a technical loser, you’ve got a selling opportunity – after all, if you like the firm’s fundamentals you can buy later at a more attractive price and avoid taking big hits in the meantime.

So, ready to get started?

The 5-Minute portfolio review takes just three simple steps for every stock you own. It’s simple and quick. Here’s how you do it:

1. The Chart

To start your own 5-Minute portfolio review, the first thing you’ll want to do is pull up a stock chart of each name you’re looking at. For simplicity today, we’ll use StockCharts.com for our review, but you could find the same technical factors with any charting software that you prefer.

http://stockcharts.com/

When you pull up the chart, you’re looking to get an overall picture of what’s going on in the stock position. Is it going up? Is it going down? If you’re more experienced with technicals, it’s your chance to apply trendlines and support or resistance levels to your chart.

You should be looking for a couple of things: first, has anything big happened in the stock? Major news items usually come with big price moves, so if there’s something you’ve missed, you’ll spot it quickly on a price chart. You’re also looking for support levels – areas that shares have typically had trouble moving below. Support is a place where buyers are lingering for a buying opportunity, so nearby support reduces your risk.

Here’s a look at a nearby support level in shares of Morgan Stanley (NYSE:MS):

http://www.ezimages.net/upload/TPBSUBS/tpb_08172012_image1.JPG

See how $12.50 has acted like a sort of floor for shares of MS? If you own the stock, you know that there are buyers nearby…

If a position has been trending lower without any nearby support, that’s a red flag. You might want to consider selling.

2. Relative Strength

You’ll also want to look at a metric called Relative Strength. Relative strength looks at how a stock has performed compared to a big index – I usually use the S&P 500, since that’s my favorite proxy for the broad market.

Relative strength does more than just tell you how your investment compares to “the market”. It also has considerable predictive power. A recent study showed that positive relative strength trends led to positive returns over a three to 10 month time horizon. So good relative strength helps to forecast good stock performance!

To pull up a chart of relative strength in StockCharts.com, just type in the ticker symbol of your stock, followed by :$SPX (so if I was looking for the relative strength of Morgan Stanley, I’d type MS:$SPX into the input box).

For relative strength, I’m looking for trends again. Is relative strength trending lower? If so, my stock is underperforming the market. Did an uptrend in relative strength get broken? If so, that’s an early warning sign that my stock is going to underperform the rest of the market for the next three to 10 months. That’s a time to consider selling too…

3. The Question

With those two steps out of the way, the final step is the most simple of all: just a single question. After you’ve reviewed a price chart and looked at relative strength, you need to ask yourself, “If I didn’t own shares right now, would I want to?”…

The sad fact is that there are a number of biases that keep investors owning stocks that they shouldn’t still own. Confirmation bias makes investors focus on information that supports their holdings and ignore sell signals. Action bias makes investors feel like they should own stocks all the time. The endowment effect makes investors value their stocks higher than an arms-length buyer would.

All of those pitfalls lead to losses. To avoid them, you’ve got to think from a different perspective. That’s the entire point of the 5-Minute portfolio review. It removes you from thinking that, “Company X could do this or that” and gets you thinking about what “Company X” is currently doing.

So, with only the price chart and relative strength chart in mind, would you still want to own shares?
With a little practice, you’ll be able to complete all three of the steps in the 5-Minute portfolio review in just a few minutes…

Frankly, the 5-Minute portfolio review takes some practice. If you’re used to a buy-and-hold approach to investing, it’s not easy to think outside the box and start using market data to make investment decisions. But try the 5-Minute portfolio review for a couple of months, and I think you’ll see that it identifies losers more quickly than a purely fundamental approach ever could.

Related Posts

• August 21, 2012 -- Avoid Losses By Using the “5-Minute Portfolio Review”
• July 25, 2006 -- The Concept of Relative Strength
• October 10, 2012 -- Technical Analysis Can Save Your Investments
• February 22, 2013 -- Three Must-Know Rules to Profit from Options
• March 15, 2013 -- 3 Tricks to Stick to Your Stops

Jonas Elmerraji

Jonas Elmerraji, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes, and a contributor to Agora Financial’s Trend Playbook. Jonas got his start on the fundamental side of the market, poring over financial statements and valuations to find sound investments – today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com, and has been featured as an investment expert in Forbes, Investors Business Daily, and CNBC.com among others. 

Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

View articles by Jonas Elmerraji