TRADERS AND INVESTORS

alike constantly face decisions about what course of action to take. Hold on to funds or get into stocks? Is it time to sit on corporate bonds or cash? Buy gold or sell it short?

So many options leads many to paralysis by analysis. When we consider the entire universe of thousands of investments, knowing which road to take and which to avoid can be more than a little overwhelming.

As I frequently point out, the best place to start is by analyzing your existing portfolio. There are likely some winners and some losers that provide objective indicators of just what ideas are working and which aren't. Big losses the 20% to 30% declines should almost uniformly be dumped. The chances of those fallen stars recouping significant ground in short order tend to be slim. This portfolio pruning is an ongoing process that, when practiced effectively, mitigates the likelihood of a reasonable loss turning into a devastating one.

But because we face the opportunity cost of a variety of unknowns, evaluating the winners is even more difficult. So what's a higher probability trade putting $1,000 into a new idea or holding on to a $1,000 winning position that's already in your portfolio?

Of course your personal forecast should always determine the approach. And if you hold XYZ and are bearish on XYZ, then you should sell XYZ, regardless of whether you've got another idea as to where to put the money.

More often, however, we're simply just spooked out. A long-held position stumbles, turning a 30% gain into a measly 15% score. Nervous about the further erosion of profits and anxious to grab the cash, we go searching for anything else to buy as an excuse to dump the winning trade.

Indeed, it feels safe to take the money and buy something new. After all, we found one winner; chances are we can find another. Lots of trading and quick scores that's the way the real winners play, right?

Wrong. All things being equal, it's always a bigger risk to establish a new position than to maintain a winner you already own. After all, it's likely taken us a number of small losses to finally find an investment that's actually performing.

Yes, XYZ stumbled from $70 to $60, but you bought it at $50 and thousands of people are buying it at $60 today with the idea it's going to $100. Open, winning trades are the engines that make portfolios run. Yet time and time again, we are way too quick to drop them in lieu of any sexy new thing that comes strolling by.

But chances are the same old boring stock you've held for two years isn't nearly as interesting as one of the dozens of exciting new investment products, particularly exchange-traded funds, that have been launched in recent months. There are well over 600 ETFs now trading in the U.S., including 26 new funds that debuted in November alone. From PowerShares Dynamic Food & Beverage to First Trust Multi Cap Growth AlphaDEX, there's now a fund that tracks almost every strategy and asset class under the sun.

Of course, just because a product is launched doesn't mean it deserves a place in your portfolio. In fact, by the time a suite of funds has been created to invest in one particularly bullish sector of the markets, the real move has oftentimes already been made.

But we get restless with the winners, mostly because there's nothing much for us to do about them but let them be. Even traders understand that "trading" is oftentimes a matter of watching and waiting. The best move you could've made in the last decade or so would've been to go long Apple in 2002 and spend the next five years at the beach.

In effect, I'm an investor when I'm right and a trader when I'm wrong.

If I buy XYZ at $50 and two weeks later it's at $45, then I'd likely trade it away, knowing that, at least for now, the market isn't confirming my outlook. But if it rises to $55, and shows me a profit, I become the patient investor who is confident to hold the position as a one part of a diversified portfolio.

I trade not out of boredom or for an adrenaline rush, but to slightly shift the odds toward higher probability opportunities when they happen to come along. But because open winning trades usually have the highest chances for success, I try and manage them simply by sitting on my hands. The winners tend to take care of themselves.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.