Skip to main content

7 Essential Elements for an Outperforming Stock Market Portfolio

By April 26, 2023February 5th, 2024Active Investor Education, EDGE Thinking

Let me start by being blunt:

You can’t add these 7 elements to your portfolio overnight.

Doing that requires serious dedication and a “strategy before tactics” approach. So, if you’re expecting tips that’ll instantly transform your portfolio into a market beater…

Best don’t read at all. You’ll be wasting your time.

On the other hand, if you are ready to tread the path of challenging limiting beliefs and reinventing the way you approach investing…

So you can eventually create a process that brings results, removes the emotional toll of making investment decisions, and frees up your schedule…

I daresay this article will be a game-changer for you.

With that said, let’s dig into the 7 elements virtually all market-beating portfolios share:

Element 1: Precise Risk Definition For Every Single Position You Open In The Market

This means you must define the exact criteria under which you’ll sell your stocks. And you must do so BEFORE you buy them.

Simply defining any criteria won’t do you much good, of course. Meaning you have to create a set that’s objective and unambiguous. And leave zero wiggle room for noise or any other factor to “talk you out of” following your criteria.

Also, don’t let analysis and portfolio monitoring get in the way of you living your life. Factor in the time you want to spend on those and do your best to stay within the limits you set.

It helps to be practical and have signals you can recognize and execute ultra fast. For example, I recognize mine within seconds.

But what should you base your criteria on?

I myself prefer technical analysis because it minimizes the emotional toll of making investment decisions. But you can also use fundamental analysis. Or a combination of both.

What’s important is your criteria are objective. And that you follow them to the letter.

Clear exit signals free you to take risks without fearing what may or may not happen in the future. Which, IMO, makes Element 1 the most liberating element you can have in an investing process.

Element 2: Define Precise Buy Criteria For What Stocks You Buy And When You Buy Them

Again, you need to create a set of criteria based on the same (objective) factors as in Element 1. The reason you define sell criteria first is a claim most sports analysts will identify with:

Defence always comes before offense.

And when you go into offense, you want your buy criteria to repeat and reoccur. Fulfilling these conditions means that what you’ve found to work in the past will continue to work in the future.

So, you’ll continue to profit without any extra effort.

Element 3: Define The Exact $ Amount You’ll Place In A Given Position

People call this element Position Sizing, Money Management, Asset Allocation, etc. Call it what you will, but it’s essentially a formula that helps you calculate the exact quantity of shares you will buy.

The simplest way to go about this is to use equally weighted portfolio positions. You can use more complex strategies too, such as % At Risk — which represents variable position sizing.

One of the methods we use to assess risk is volatility. So, the higher the volatility, the bigger the risk of a particular trade and the smaller the position we take. And vice versa.

This helps you be as consistent with your risk management as possible.

Whichever strategy you end up going with, it’s important you get the balance correct.

That is, you don’t want to end up in the situation where 90% of your trades are winners, but the losing 10% end up being bigger than them in $ terms.

Read the previous line once again, and you’ll see why deciding how much $ you put into each trade is just as important as what and when you buy/sell.

Element 4: Establish Razor-Sharp Focus

It all boils down to focusing only on things you can control (your investing process)…

And not caring about things you can’t control (trade outcomes, “noise”, news headlines, etc.).

Here’s how to do this when building your portfolio:

Define a “universe” of stocks. Let only stocks that pass certain criteria enter such a universe (e.g., large cap, household name, trendable, highly liquid, medium to high-volatility, etc.).

Then look for buy/sell signals and trends to develop in that universe alone. And stick with them through thick and thin.

To actually ignore all other stocks, you must completely eliminate the fear of missing out (FOMO). Which is far from easy.

What helps me keep it in check is remembering the market is an endless stream of opportunities. So, there’s no need to chase those outside of your focused universe.

Chase them, and you become inconsistent. The moment this happens, processes break down, along with your chances of achieving long-term market-beating returns.

Element 5: Measure The Right Things

When I say “right things,” I mean mistakes and portfolio performance.

Measuring the former can be tricky because we tend to consider things going wrong a mistake…

And things going right a win.

Which would mean losing trades are a mistake while profitable trades can never be one.

But you can’t measure yourself only based on outcomes. Not if you’re aiming for long-term success in the stock market.

You have to instil processes and then measure if you follow them come what may…

And be okay with taking small losses in doing so. Think of those as wins against potential large losses in the future.

Keeping a journal helps. Note down each time you deviate from your defined process. This shows you how consistent you are and if there’s room for improvement.

When it comes to measuring performance, you should do so in absolute and relative terms.

Absolute means measuring both in annualized returns percentages and $ returns needed to reach your financial goals. Relative means benchmarking against indices. This tells you what’s on offer in the market… and how you’re doing in comparison.

One caveat:

You should use a Portfolio Management / Tracking tool to do all this measuring. Or you’ll get lost in the process.

Element 6: Make Your Investment Plan

This basically means documenting the previous 5 elements, so you can easily asses and enforce them.

I touched upon the importance of making a bullet-proof Investment Plan in last week’s article.

So, today I’ll just tell you that having a well-written Investment Plan is a must if you want your portfolio to outperform the market in the long run…

And get ahead of most investors out there who never finish it because it’s hard work that requires lots of thinking.

Element 7: Creating A Winning And Consistent Mindset

This element is the by-product of going through and diligently enforcing the previous six elements.

As I always say, your mindset represents 90% of your investing edge. But without the other 10%, which is having a verified system and process — it won’t do you much good.

Executing the criteria that define your process without exception over and over again makes you consistent.

And in the stock market, consistency is the best breeding ground for achieving your long-term financial goals.

Does Incorporating These 7 Elements Actually Produce Market-Beating Returns?

Well, I can only show you how our mechanical system (SPA3 Investor), which was built and executed based on said 7 elements, has performed.

If you’re interested to see its results, go here.

As I’ve said from the beginning, this is not a “do this and that, and you’ll profit” kind of thing. Mastering and internalizing the 7 elements takes time, patience, and perseverance.

Even then, there are no guarantees in investing (and in life).

However, in my experience, the 7 elements above are your best bet if your goal isn’t just to outperform the market and secure the retirement life of your dreams…

But to do so with minimum stress and emotional pain while not sacrificing too much of your free time in the process.

It’s the path all my mentees in the Systemized Investing Program and I took.

And treading it has brought many success stories over the last 28 years, which is why I decided to write about the 7 elements today.

Now it’s up to you to decide how to use this information, if at all.

Leave a Reply