When I started buying stocks about 45 years ago, I used a very simple approach to managing my portfolio. There were a couple of reasons for this. One reason was I really didn't know anything about managing a stock portfolio, and the second reason was that I didn't have the tools to do anything more than use a transaction log and a profit and loss table. But it really didn't matter. I wasn't buying that many stocks anyway. Brokerage fees were so high that I was very deliberate about what I bought, and then I was literally forced into holding my stocks for the long-term because of the high transaction costs. More often than not, this practice caused me to hang on to losers too long and it cost me money I shouldn't have lost. Then I got into the bad habit of selling my winners to make up for the losers. All in all, it was a mess.

Finally I decided not to let brokerage fees dictate how I managed my portfolio, nor should I allow tax considerations to dominate my decisions. I had to let the stocks tell me what to do. So I began to use a 10% stop-loss price as a signal to sell and to take profits whenever I thought it was appropriate. This worked a lot better for me. I was also comforted to know that if I had at least ten, dollar-weighted positions in my portfolio and used a 10% stop-loss, I would lose, theoretically, no more than one percent of my portfolio's value on any one position. It wasn't the total solution to managing my portfolio, but it was a major step in the right direction.

Although VectorVest OnLine's Portfolio Manager defaults to ten, dollar-weighted positions, it allows you to have up to 100 positions in your portfolio if you wish. If you want to retain the principle of a one percent loss per position, however, you need to adjust the stop-loss percentage. For example, you should use a 5% stop-loss with a five stock portfolio and a 20% stop-loss with a 20 stock portfolio. Generally speaking, risk decreases as the number of positions increases. But there are no free lunches in the stock market. Performance usually goes down as the number of positions exceeds seven. Most money managers, I'm told, wouldn't dream of having fewer than 50 positions in their portfolios. This practice adheres to the rule that you never want to expose more than two percent of your money to any single trade.

In addition to Stop-Prices, Portfolio Manager also allows one to use a variety of other exit strategies. Since the "Rec = S" selection is hard to beat, I always use it first in my back-testing research. If the results are promising, I'll try to get better results with other exit strategies. Various combinations of position sizes, stop-gain and stop-loss percentages often do the trick.

I must confess that I'm still trying to create a practical system of managing top VST stocks that will out-perform the simple approach of rebalancing. You may recall from my previous essays that the less you manage top-ranked VST stocks, the better they perform. No, I haven't cheated and looked at the strategies that have been submitted for "The Chairman's Challenge," a competition introduced on March 24, 2006, but I'm tempted.

If you want to have some fun and maybe win $2,500, try solving the riddle of managing top-ranked VST stocks. My guess is that the answer lies in Using The Right Stop-Prices.