Larry’s Note: Today is the last day to catch the replay of my Zero Stock Retirement event… which means if you haven’t checked it out yet, this is your final shot. Watch here.
During that event, I shared my favorite options strategy for pulling out steady profits from the stock market. This method has handed my readers a shot at making hundreds or thousands of dollars over and over again. All it takes is five minutes in the morning, and you’re out of the trade by 4 p.m. ET. So you’re never worried about what might happen overnight.
So don’t miss out on my Zero Stock Retirement strategy… You can get all the details here.
One common piece of investing advice is to diversify. The theory is that by spreading your money across a broad range of stocks and other financial assets, you’ll greatly reduce risk and volatility. That will help you avoid big drawdowns.
To be fair, diversification might work sometimes. But it’s not the panacea that some folks imagine. Plenty of times, various assets sell off all at once – especially when an external shock rips through the market.
And if you’re focused on short-term trades, diversification can become a trap. The more positions you hold and the more diverse they are, the harder it is to maintain focus and follow your risk management rules.
So let’s dive into some of the factors you need to consider…
When folks start trading, they tend to spread their net wide.
They follow dozens of stocks, sectors, and broad macro themes at the same time. They can diversify so much that it simply isn’t possible to pay attention to everything properly. A professional institution like a hedge fund would employ a whole team of analysts to do the same tasks.
When your focus is diluted, you can struggle to develop an “edge.” By edge, I mean you gain an almost intuitive sense of how a stock might move… You get a feel for its typical trading range and the types of catalysts it reacts to the most strongly. And you grow your familiarity with what kind of setups prove most profitable.
That’s why specialization is so crucial. I learned firsthand that you need to develop a clearly defined “trading universe”…
It might be a handful of stocks or a couple of indexes. For a time, I narrowed my universe to mainly the S&P 500 index, with a small number of stocks that I traded on the side.
When you watch the same tickers day in, day out, you develop a real understanding of how they behave during company earnings, interest rate changes, and geopolitical events – like we’ve seen with increasing frequency this year.
Of course, you don’t have to stick to the same stocks or indexes in your universe forever. You can simply drop one name and replace it with another that better suits your strategy.
But ultimately, you should keep a tight hold on the number of ways you split your attention. Learn from my mistakes…
I learned this lesson the hard way. When I started my career, I jumped on anything in hopes of catching a move – bank stocks, bonds, tech, oil, or even gold.
I thought that more opportunities equaled more profits…
But instead of collecting a string of wins, I made a lot more mistakes. By the time I got in on a move, I was usually late. The experts had already banked their gains and moved on to their next trade. I also got sucked into false moves – something specialists knew to avoid.
You need to know what makes a stock or index tick – and just as importantly, when to avoid it. Think of everyone who bought gold in January, right before it reversed and tanked.
When your focus is spread too thin, you miss the signals that really matter.
I learned over time that specialization gives you an edge as a trader – especially when markets hit a rough patch or unexpected events shake stocks up.
Professional traders don’t trade everything. Instead, they trade a small number of stocks really well.
That’s even more important now with markets way overstretched. So if you’ve currently got more positions than you can handle, consider pruning your selections down to a specific “universe.” Once you focus on those specific tickers, you’ll likely find more consistent profits heading your way…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
