Investing can be a wonderful tool for creating and building wealth.  One trait that top investment professionals stick to is a detailed and well thought out plan.  Plans can take many forms: for some a plan may focus on a certain type of stock (i.e. technology companies) or investment style (i.e. growth vs. value).  WiMan investing in front of laptopth the advent of high-frequency trading and trading algorithms some of these plans are quite complex.  One lesson all do-it-yourself investors can benefit from is establishing an asset-allocation and sticking to it.

By all accounts 2013 was a great year for the stock market, high-flying info and bio technology companies like Facebook (FB), Splunk (SPLK), BIogen-Idec (BIIB) and many others could do no wrong in investors’ eyes.  Investors starving for growth after several years of mediocre growth helped push these stocks well past reasonable valuation ranges.  Momentum stocks like these are wonderful to be in on the way up but as they grow they can become significantly oversized positions.  This presents a difficult challenge for many investors, the idea of selling a company that has done well and shows no signs of letting up.  By falling into that trap we as investors run the risk not being able to exit the stock fast enough when sentiment changes.  In stocks like these the market’s darling can become an outcast in short-order.

That doesn’t mean companies like these have no place in a portfolio!  High momentum names can be useful when paired with investment discipline.  One method to control your portfolio’s risk is to set limits on what percent of the portfolio you are comfortable having in these types of stocks.  If/when your allocation exceeds this threshold be disciplined and sell some of the holding.  The willingness to stick to a plan helps to avoid having all of your gains eaten up by the extreme selling pressure that often occurs with these types of companies.  Selling portions of a holding over time helps mitigate this potentially expensive risk!

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