The Capricorn Effect and May Sell-off

[dzwm87]

In some cases, I may even sell a smaller loss-making stock in order to buy one that'd dropped a lot more in % terms. When the market do finally recover, guess what? As long as you'd made your decisions based on valuations, the money placed (switched to) in a more under-valued stock ultimately leads to a bigger improvement to portfolio performance. The problem is... how accurate is your valuations??

Yes indeed. The key is not the amount of 'paper profit/paper losses' but the opportunity cost available. An investor should be more aware of its opportunity cost and not simply be concerned about how much its portfolio is currently making - that can be deceiving to one's emotions and in worse cases, may just be temporary paper profit.

Personally, for small capital portfolio (anywhere below $50K), I will prefer a very concentrated approach. Better to focus your attention on the 1 to 3 eggs in a basket than having a diversified approach in both stock holding and your due diligence. Of course, one may argue a concentrated approach can have a lot of risk. But, for myself, I believe that such 'risk' can be mitigated via a disciplined margin of safety approach - you don't go for stocks with only 20-30% gain but those which potentially can hit 80-100%. So even when bad times hit, your losses can be minimal or your gain can be reduced to only 20-30%. Same logic as 'aim for the stars, even if you fail, you will land on the moon'.