Investor's Corner: Concentrate On A Few Winning Stocks

But a portfolio is hard to manage when it holds more than a few stocks.

"The more you diversify, the less you know about any one area," IBD Chairman and Founder William O'Neil wrote in his book, "How to Make Money in Stocks."

"The best results are usually achieved through concentration, by putting your eggs in a few baskets you know well and watch very carefully," he said.

If you have too much on your plate, you may miss warning signs on some stocks that may have peaked or are giving back profits.

So, what's a reasonable number of stocks to own in one's portfolio? If you have $10,000 to invest, two or three will do the trick. With $25,000, you can expand that to three or four. Even if you have $100,000 or more, five or six stocks should be sufficient.

If you see a stock that you think has strong potential, consider getting rid of your weaker performers and use the cash to buy it.

If you notice that one of your stocks is doing well, add shares to it when a secondary buying opportunity comes up. This can be when the stock rebounds from a first or second pullback to its 10-week moving average or while it's still within 5% of a proper buy point.

When you keep track of only a few stocks, you'll have a better grip on their price-volume action, current news and potential sell signals. Then, you can keep a watch list of other candidates if you need to swap stocks.

In the current market correction, it's best to wait on the sidelines. You can build a list of stocks you like to get them when the market finally rallies. It's better to have a few winners than a large portfolio of average or underperforming stocks.

Take NutriSystem (NasdaqGS: - ) and Potash Corp. of Saskatchewan (NYSE: - ).

NutriSystem had a big run-up to its top in May '06 (point 1). But with the market going into a correction, it couldn't sustain its advance. The stock started to experience greater volatility, tracing deep bases (point 2). Also, its fundamentals started to experience decelerating growth. This was a red flag for investors.

Meanwhile, as soon as the market picked up in August '06, Potash, a fertilizer company, traced a long and strong advance (point 3). The company was coming out of a slump, and earnings growth accelerated substantially.

Investors would have done well by getting out of NutriSystem and buying Potash to boost returns.