stock markets

[ANALYSIS] Diversify to manage risk in your stock portfolio

Den Somera

This is AI generated summarization, which may have errors. For context, always refer to the full article.

[ANALYSIS] Diversify to manage risk in your stock portfolio
A single-stock portfolio can leapfrog your investment returns. But it is also your single ticket to doom.

The advantage of having a diversified stock portfolio was clearly demonstrated two weeks ago when the market closed at 6,379.03.  This broke down the 6,400 psychological barrier that has served as the market’s technical support level for the last eight months.  

It was a bloody week.  

As a consequence, almost everyone in the market was hit, except for those who maintained a good selection and diversity of stock positions.  

This can be seen from the varying degrees of losses suffered by the different sectors of the market at the time.

Single ticket to doom  

However, while the market was generally down with several counters severely hit with heavy losses, some counters managed to show slight losses or even possible gains. This is why you may have some stocks that are not badly affected. 

Also, this is the difference you will enjoy between maintaining a single-stock portfolio and a diversified one.  A single-stock portfolio can leapfrog your investment returns all the way to the stratosphere if you hit it right. But it is also your single ticket to doom – and bust – when you chose the wrong stock.  

The strength of a single stock portfolio is then also its weakness.  This is because a single-stock portfolio puts pressure and emphasis to relying on correct prediction. And as you and I know, this ability is beyond the realm of fallible mortals like us. Unless you are lucky.

Speaking of luck, this reminds me of the story of someone who at the turn of the last century hit the big time in the stock market because of luck. This is the story of Jesse L. Livermore. He was a fascinating and fabulous American stock trader during his time.  He is considered the pioneer of day-trading.  

If you want to know more about his success as a stock trader, his life’s story was the basis of the best-selling book, Reminiscences of a Stock Operator, authored by Edwin Lefèvre.  It’s one of the best classics on stock trading.  

Must Read

[ANALYSIS] Time to look back to see the future

[ANALYSIS] Time to look back to see the future
Tested through time

The trading techniques he revealed to the public, which were captured in the book, were tested through time by many traders, who acknowledge that they owe a great debt of gratitude to him – and to his teachings – in making their money.  

His trading rules earned him millions of dollars.  He also lost his entire fortune on more than one occasion when he ignored his trading rules, accordingly.  

Based on some accounts made on him, Livermore’s peak wealth would equate to US$1.5 billion today.

In his waning years, however, when asked why he lost his fortunes despite his effective trading principles, his answer was that, he – ultimately – ran out of luck.  

He is worth emulating: He was a prolific, imaginative stock trader, trading with complete sangfroid in the midst of market chaos.  But there is one thing that you must not try to copy from him: Jesse L. Livermore died by suicide.

Impressive comeback

The market last week came back with an impressive performance. It made a trading streak that catapulted the market back in the running, which also – paradoxically – broke its resistance level for the last eight months, in the process. This broke the 6,600 psychological resistance level of the PSEi, rendering it suddenly to become the market’s new support level.

However, the rally was gradual, smooth and easy, accompanied by commensurately increasing trading volume and total value turnover – elements that can only be present in a healthy market.  

Those who didn’t give up were vindicated. The market closed at 6,379.72 on the first day of the following week, up 0.01% or 0.69 point, on a trading volume of 332.82 million shares and relatively low total value turnover of P2.82 billion. The advance was somehow muted by the trading activities of foreign investors who stubbornly stood pat as net sellers.   

Things continued to turn better the following day.  The market perched at 6,398.64 at closing time with a net gain of 0.20% or 18.92 points.  

The tempo of the market’s upward climb went faster in the next three days, accumulating another 3.5% or 228.95 more points of total gains.  Surprise of all surprises, it was the trading activities of foreign investors that decisively enabled the market’s climb.  Foreign investors become net buyers this time with market participation to as high up as 56.02% of total market turnover.

Daily total sales transaction or value turnover also went back to hit as high as Php6.57 billion. Trading volume also reverted to the more normal levels of 500 to 700 million shares, which denoted that investors started to chase first and second liner shares in lieu of third liner stocks.  

By the close of trading last Friday, the market index settled at 6,624.69.  This was higher than what traders hoped for the market to show that it is still alive.  Again, this record actually broke the market’s old resistance level of 6,600 for the last eight months.  

Not yet out of the woods

The prevalent trading advice is not to be carried away with the market’s amazing comeback performance: Instead, you have to trade cautiously.

Initial trading results this week show some profit-taking is going on.  Should this continue, it may serve to pull down the market’s climb. Come to think of it, there are developments that may serve as either good or bad catalysts for the market, soon. These are the June inflation data of the US and how the US Fed will respond to it when it meets to discuss policy on July 25 to 28.  

Another is the expected big-time hikes in oil prices that may ensue due to the production cuts of Saudi Arabia which may extend up to August, compounded by the export curtailment measures enforced by Russia to prop up crude prices, and the production stoppage in one of the oil fields in Libya along with ongoing geopolitical tensions.  Not too far away, as well, is the need to prepare for the coming “Ghost Month” of August.

We will further deal on the fundamental investment principles that will make the above trading strategy work better in the coming days. –

The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise.  Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity.   You may reach the writer at

Add a comment

Sort by

There are no comments yet. Add your comment to start the conversation.

Summarize this article with AI

How does this make you feel?

Download the Rappler App!