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We're going to talk about building a portfolio through accumulation with a $20,000 account. That's what we'll cover here in this post.
Before we get started, I think most of you know this, but all investment theories concepts that we cover here in this module is for theoretical and illustrative purposes only.
It's not investment-specific advice simply because you might be reading this post later. Also, your investment risk tolerance might be different. Contact your financial adviser before placing any trade. There could be a lot of risks involved in trading and investing.
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Getting Started With Building a Portfolio
I chose a $20,000 account simply because it's an excellent average account that I think most people are starting with. They're getting into trading, or they're looking to invest. And it's one of those that also is difficult to build up.
It's a lot more challenging to build up a smaller account than it is to take a more significant account and make $20,000 from $1,000,000.
Look at some of the things that we can control in the market. The first thing is the time. Just for illustrative purposes, I'm going to use left to right because it's easier.
Your investment timeline or time horizon is going to be finite. It's going to have a starting point and an ending point.
This ending point can be determined based on:
- the price movement
- the success of your trade
- the life of you doing investments
Once you hit a certain age, you might stop at some point. In either case, there is a stopping point.
This initial point is your starting point from when you're researching to get into the trade. But ultimately from when you put on that first trade. When we go into investments, some risks are attached to it.
Number one is pretty heavy price risk. We look into time initially when we put on that first trade we have very minimal price risk.
The moment you put on the trade that trade is barely moving. But as we continue moving through this time frame that's when the risk starts to happen. You have to start looking at things through time. If you've had trouble with this looking at a finite example then maybe this will help.
As you start looking at this, you have to break this apart. One of the ways to do this is through accumulation. When you look at the time and you look at accumulation you can reduce your risk. That's possible because, in the end, it comes down to the risk that you have. You can reduce that risk through accumulation over time.
As you continue moving through time, your second trade might be over here, and then your third trade might be over here.
After you get into three full trades, then you have your full position. But this is only about half or a third of your total full trade.
We might only get into 30% of completion when we finalize the trade. The next part of that trade could be profit taking. It could be profit taking or managing. And then the remaining part is exit - exiting section.
This is where we get through a full trade, and most people don't think about it that way. If you start breaking things down in segments, the beginning part is to get into the trade.
The next part is managing, or you take your profits. It could also be adjustments depending on what you're doing. Then the final part is exiting. You could also exit through doing it in stages a stair step pattern.
The most important segments are:
- getting into trade/accumulation
- managing/taking profits
Our primary focus right now is going to be talking about this first part which is getting into the trade and accumulation.
If you do this part well and if you get into the trade at the right time and you do it with lowering that risk it saves you a little bit even if you're not as good at managing or exit section.
I think managing and adjusting your positions is also one important part. And then if you exit even too soon you should be okay.
If you get these two parts down, then you should be reasonably good within your trades. I'm going to show you how this can work out for you.
How you can break apart the time at getting in to reduce your risk?
Showing that to you is my goal. We're going to look at different time frames so that you can get into the trades by reducing that risk. And you are then managing it. I'm going to give you some tips on that as well.
Let's take a look at some charts and again we're looking at a 20,000 dollar account to start with. It's a nice number, and if we take a look at Facebook right here, you can see I'm looking at a daily graph.
You can tell it's a daily graph because of the icon indicator up right there. I'm looking at it from about June timeframe to December and January. You can see the stock has gone up and then pulled back a little. There's little sideways action.
That's overall our movement. Now if I take this out on to a longer time frame (a weekly), you can see we have some pullbacks down, and the stock has been heading higher most of the time.
And then we get a little pullback right now. Looking at your timeframe of investment depends on when you're entering this stock chart and the length of your investment. If you were a person who is looking to hold for a few days and you got into the stock at the beginning when it first opened up you most likely would have lost money.
That's the case because your time horizon was a few days and that stock was heading lower. Now there is another scenario where you look at things on a longer-term perspective. You might get in at the beginning of this stock wherever in the earlier parts this stock continued to head higher.
The problem is always the risk that goes along with it. If you still had a long term perspective, but you got in it at the beginning down there sometimes it's challenging to keep your cool.
It's challenging to keep that mentality or psychology in check. If you had done the accumulation part, you would have purchased a few shares let's say right here.
Then again a few shares over here and a few shares maybe over here in this area. You're putting on a few shares from 2012, 2013 and 2014. It's a three-year span across let's say 6-7 year time horizon you would have been fine.
Your average would be somewhere let's say around this area (yellow arrows). That would put the stock price around $45. That's your average right around $45-$50 of accumulating those shares. And now you're at the $120.
A little pullback would not have hurt you that much. However, we don't always trade that way. We don't always know the length of time that we're going to be in a trade. When you do accumulation, it can often help you reduce that risk.
Analyzing Daily Chart
Let's look at some of the more difficult situations and let's look at Facebook.
If we look at the daily chart and if my time horizon is a year I might look at this chart of one or two-year timeframe. Now I come to the question of well how long do I want to accumulate these shares for?
We take a look at the time to buy, and we're looking at about one year. This whole timeframe is a year or in other words twelve months. That is what we're looking to do a full investment on, but our starting point is at the beginning.
If we start here what is our accumulation phase going to be? We could probably afford anywhere between a zero to four months to accumulate our position.
You don't have to get in it all in one day or all in two days or all in three days. I know it's exciting, but if you're looking to invest for about twelve months, probably four months is good enough.
You could do it in two months or one month. That's up to you depending on how you're looking at the chart. Four or five months is also fine because you'll see here as we start playing with numbers how this all plays out.
I'm sharing with you precisely the way I think about things as I'm looking to make a trade.
We're taking a look at Facebook here, and we want to build upon our position through accumulation, and we do it based on time. You can do this in a few different ways.
If you're looking at a year position, you could accumulate everything, but some problems could go along with that. I'll share with you here shortly.
The other approach you could do is stagger it a bit. Do one per month or do one every three months. You could do something like this. Or you could do something even further out. But then if you're holding patterns one year, you have some problems.
Important note: We need to decide how many shares we can buy and how many stages of accumulation do we want. If we do it in thirds, we're saving ourselves about 30% to 60% on a pullback. That way you're not getting in all at once.
The whole point is that if you get in a large chunk or 30% of your position and the stock's pullback you still can afford to buy a few more shares at the lower price level. That's ultimately the goal. Whereas if you bought all the position all at once and you have a pullback you're going to have some problems.
That's the case because you have spent all your money and you're down for the count. That's why you want to do accumulation and building out a portfolio in this way through accumulation. And you can do this with many stocks.
If you're doing it with multiple stocks, take your portfolio and reduce it in half to do two stocks. Or reduce it in thirds if you're doing three stocks. And even if you want to be even safer, this is what you can do.
Let's say you had a $20,000 portfolio. You could trade with $10,000. And if you want to trade two stocks, you can trade $5,000 with one stock and $5,000 with another stock. That will give me my $10,000 even though you have a $20,000 portfolio.
That means you have $10,000 remaining in cushion because you've used $10,000. You have $10,000 in a cushion for adjustments and so on. It depends on how you structure the risk.
How You Can Do It Properly?
Here're a few different variations in situations that we have right here. As we take a look here and get into our position right over and I start building up my account, this puts me at about the $85 range.
On a $20,000 account, we have 235 shares. If I want to do this in thirds, we get about 78 shares. But if I want to be a little more conservative call it 50 stocks to make matters simple. So here 85 times 50 shares, that gives me $4250 on this accumulation part.
The stock then pulls back a little bit and then continues moving. Let's say I wait another month or two and I do a second accumulation over here (yellow arrow).
My next accumulation here is right around $90. We do 50 shares because we're still in the same price range and level. I want to give you perspective since we budgeted conservatively. You get $4,500.
Now we're up to about $8,750 in our spending capital. What happens now is impressive. You can see we're fairly profitable, but then the stock pulls back a bit. And this creates an excellent opportunity for you to buy some more shares. Remember your holding time is about a year maybe two years a year and a half. You're able to get the stock at $82 and again would do 50 shares to make calculations simple.
You can budget accordingly and play with the numbers. But I'm keeping it 50 to make the math simple. Fifty shares times $82 and now I get $4,100.
In total, if I add these numbers up, I have $12,850. That's the total that we've spent, and it's nowhere near our $20,000 range. But now you've averaged your prices. That is fantastic because now you have 50 shares at $90, 50 shares at $85 and 50 shares at $82.
Your price average for these shares is $85.66. That's what I got as far as the math goes. Of course, you can do your calculations. We're right around the $85 range here for our average.
We have a time horizon that we're looking at from this September timeframe for September of next year. Now we're allowing things to ride. And not everything is going to work out perfectly. As you can see sometimes, we come back, and this gives me right around the $95 price range.
Then they come back around here about $108 price range. But overall my prediction was correct, and this worked out well on the accumulation part. It allowed me to gain those shares at a lower price averaged out my position and buy things at lower prices.
I did in thirds. You can do it in quarters you can do it in half. If you have less money, sometimes you do it twice. If you have more money, you could do it in 5-10 times. That's how prominent money managers do it. They continue to accumulate day in or week on one end. And they continue to build out that account.
This works out well because I can see the future here on this chart. But what happens if we do it differently?
What To Do If You Make a Mistake?
Let's take a look at if you did this completely bad because accumulation is there to save us a little bit from a bad mistake. And I want to share with you where the risk or reducing your risk through accumulation can help save you.
Even if you put on a horrible trade initially, you can do something to correct things. Let's say you got into the trade somewhere around this level.
We can say 133 since it's all almost at the highs. If I go 50 shares multiply that times 133 we're going to get $6,650.
That's going to be our total that we've spent right there on that position. We still haven't spent our full $20,000, but now you see things rolling over. As you see things rolling over you probably want to wait if you can get it at lower prices.
And if you see things here coming in and bouncing even if you caught it at the highs. This is your next step of accumulation. Things are going higher - let me accumulate. Now you're accumulating at about 122.
Do the math: 50 shares times 122 gives me $6100.
Now I have a few shares at 133. I have a few shares at 122. The stock again rejects those prices, comes back lower and I say this is tearing me apart.
Then it pops higher, and it comes back lower. By now you can see it's bouncing off of this price level. The first one you probably wouldn't be able to see. The second one you might have been able to see it. And the third one you should be able to see it, and you say you're going to buy it at the 115 price level.
If you went ahead and bought a little bit more (again 50) at about 115 that gives you $5750 on that position, all in all, if you take the average, we get a price point of 123.33.
That puts us now somewhere right around this price level. You can see the difference of where we're at. It's not very different from being up at the top at 133. Because if I put in all my money at $133 it would pin me to having that stock have to go up to 133. I've average down, and that is not always the best approach.
If you do it in stages through accumulation and you've planned for this in advance, you understand that you're reducing your risk over the period.
I usually say do not average down on your positions. The reason is that what people typically do is they put in 100% of their position at the beginning.
They put in everything. They put in the full $20,000 or whatever it is that they have initiated at the beginning. When they do that, and things sell off now, they try to double down. They get more money, they need more money, and they try to add on to this position as things are having higher.
That does help, but you don't have a plan in mind. Here when you look at it, you can see the plan that I have in mind. I plan to do it in thirds as I mentioned earlier.
There is what I need to stock to get into to break-even. Now I could set my stop, and my stop could be a that big point where - that 115.
If it gets below that, I'm out. I take my losses, but it's not as bad as being up at the 133 level.
Looking at Price Point
The other advantage to this is that if I'm looking into this price point, you have to remember that I'm accumulating 50 shares at 115.
If I have 50 shares at 115, we have $5750 invested. That's what we have invested. Now keep in mind these 50 shares I could go ahead and peel them off to take some profits to reduce my risk.
I'm thinking about what's my risk. I have these 50 shares that I can use to make money on to be able to make up the difference for these shares at the 133. Separating those things is crucial. Separate those things from your mentality.
Maybe this is the case. This went up about $4. That amount times 50 shares and you get $200 in profit. That right there helps you make up the difference.
You're reducing your risk because now you only have the 50 shares remaining from this part and the 50 shares remaining from this part (in yellow). If it rolls back over and goes lower, you can buy back the original 50 shares from the 115 price level.
I know it may sound confusing, but you're using the 50 shares from that 115 price point to roll them constantly. To continually make money from them as that stock heads lower, and bounces have lower and bounce up until you can either make up the difference for these other shares. Or up until you get out from a stop if that is your stop.
All these things come with making a plan in mind. You can see how the accumulation stage helps you reduce that risk based on your time horizon. That's the case especially if you're looking at a year plan. The difference is we're going from October to January, so we still have about six-seven months to make up those differences.
If it heads into month four and five and I'm still struggling probably, it's the best to get out of the position.
Maybe you don't see things turning around. Then it's better to put your money elsewhere. In general, I can stair-step on the way up, and that's my accumulation and then allow me to make money from the steady uptrend that's going to happen.
The more significant thing to learn from this is that if things continue to head lower, I can average into my position. That way things do reverse. Not every time but if you're picking the right stocks, looking for a longer term and if they're paying out dividends it helps you make up those differences.
That way even if you get stuck in the last one or two positions you can use them to make up the difference with those bounces. You're averaging into them. But obviously, the critical point is that you don't put 100% of your position all in that one spot.
If you put it all in on that one spot 100% and you do it from the beginning that's where people get in trouble. That's why you don't double down on a losing position. The reason is that because you already put 100% of your money in here. And now you're trying to double down to make up the losses from earlier.
That's why having a plan is the smartest idea. If you're going to accumulate in stages, it allows you to reduce that risk because of splitting things into time. You have to know your investment horizon for that.
Great Strategy That You Can Apply
You can do this across multiple stocks. It's hard to overlay this with charts and draw at the same time, but let's say you had another stock chart.
In one stock you bought in May and July and September. The other stock you bought in June August and October. Now you start looking at the fact that you've done accumulation three times in every stock.
You've also staggered the months and the different position. You have two stocks each one accumulating three times and alternating months. You could do things that way as well. Keep in mind now you start getting into multi-level diversification and accumulation.
That's where you can take things further. My goal here was to share with you the accumulation process and why you're accumulating over time.
If I see a stock breaking out, I know it's bouncing because right here is a classic pattern of support. Even if I see it bouncing if you're looking at a shorter timeframe it's sporadic I'm going to get in 100% of my position on the first day.
Why would I put in 20,000 shares on the first day? When I could put in 5,000 shares at the multiple points. That's perfectly fine because I'm letting the stock prove to me and then I take the 5000 from this first position, and I take those profits off down the road.
And then as it continues to move higher, I may take off profits when it is the right time.
Then this third position I could let it sit and let it build upon. And I can add back from the first or second trade again back when it bounces again.
It's a rotation, and it's dynamic. Trading is dynamic, and I hope you see that. It's a little confusing drawing it on screen, but I hope it's giving you a bigger picture.
You're rotating things through. Even if you're doing swing trading, you can see how this works out because you go in one day, two day or third-day fourth day. But now you're taking the profits down the road.
And then again you start reaccumulating. Then you might take profits. Or you might continue the accumulation process. And then as you start seeing it weaken off, you take the profits then.
Your goal is to accumulate - to reduce your risk. Don't put in 100% of your shares or 100% of your position right away. The main reason is that you don't know if that second day, the third day, the fourth day it's going to be a down day.
You don't know if the trend is going to change up. That's why you stagger those things because it allows you to reduce the risk based on time.
Trading is dynamic, and you have to think about breaking apart your positions that you put on position number one, position two and position three and start trading off of those to psychologically reduce the risk for yourself.