Perhaps the most vulnerable time for a portfolio strategy is in the phase of initially getting positioned. Unless your strategy is a very short duration holding strategy, it may be best to phase in (or leg into) your full position. Like priming a pump, a portfolio strategy needs time to get traction and begin its growth generation. This initial phase is more vulnerable to market timing and some initial shake-outs. By phasing into the full position over a period of time, you can reduce the initial market timing risk of becoming fully invested one day and the whole market have a bad day the next day. There are a couple of different phase-in, or leg-in, strategies that I often recommend when getting positioned into a new portfolio strategy.
Percentage Phase-in:
This approach allocates a percentage of your portfolio funding and begins to take a partial position systematically over time. Say your strategy calls for taking a position of 10 stocks. Instead of selecting and purchasing all 10 stocks at once and maximizing the market timing risk, get positioned into 1 or 2 stocks initially, and phase in the other stocks in a piece-meal fashion over time. For example, if we need to get fully positioned into 10 stocks, we might select the top 2 initially, and then phase in 2 additional stocks each week over the next 4 weeks. At the end of 5 weeks, you will be fully positioned and in the process you have less exposure to market timing risk. Using this approach, you may also benefit by selecting the best stocks (according to your strategy selection criteria) each time you add to your position.
Strategy Phase-in:
This approach uses your strategy itself over time to get fully positioned.
In this approach, allocate a percentage of your portfolio funding for each position and simply wait for the next position recommendation to come up. Some strategies will trade infrequently and when the exit criteria signals the exit of a position (due to hitting a profit target, a stop loss target, or a sell signal), a replacement is selected according to the strategy criteria. With the strategy phase-in approach, you might initially take small partial position into the full portfolio, and then add into it when new positions are added or replaced into the portfolio. This will allow you to get fully positioned over time.
The Full Plunge:
As the name implies, the full plunge approach will get you immediately fully positioned. You can allocate your portfolio funding across the current portfolio holdings, or apply the portfolio strategy selection criteria to identify a full position in stocks that are currently the best selections. This second approach will very likely select an entirely different set of stocks than the model portfolios so in using this approach, you will need to be able to track the strategy performance separately and monitor for profit and/or exit signals. Also, be warned that the full plunge approach presents considerable and immediate market exposure risk. For this reason I do not recommend the full plunge approach for anyone other than the most aggressive and risk tolerant investors.
Summary
The key lessons and elements to successfully getting positioned are:
1) Always remember you are in control. Select an approach that fits with your individual investment style and risk tolerance.
2) Learn to let time work for you instead of against you.
3) Consider the 'getting positioned' phase of establishing a portfolio like a farmer planning his crop. The soil needs to be tilled, the seeds planted, nothing will grow until the seeds are planted. We then need to give the crop time to develop before we harvest it… and we may need to do some weeding during the growth phase… that’s called portfolio management.