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Tackle Today: Portfolio Design Basics

December 2, 2020

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Last Update: August 2021

≈ Have you started writing your rules? ≈

Traders,

An investment portfolio is a collection of all stocks, bonds, currencies, commodities, and real estate owned by an individual. In your account, you will use these products to build your portfolio. Many investors will build long-term portfolio’s in their retirement accounts. 

Traders, on the other hand, will use short-term strategies (day, swing, position) to take advantage of price movements in these products. If you are a new trader and have not identified which strategies you will use and why this is an especially important step in building your accounts trading plan i.e. ‘portfolio design’.

As you develop your trading system over time you will be introduced to new strategies. One of the most important things you can do for yourself is to design a portfolio and identify which strategies you will use, how often and with how much money per trade, and as a % of your account.

Here is a simple exercise you can do. Take out a piece of paper and make the following 3 lists:

  1. Theta Strategies (aka Cash Flow)
  2. Growth Strategies (aka Long Term)
  3. Speculation Strategies (aka day trading, swing trading, delta, vega)

For each category, then assign a percentage of your account you have allocated for each grouping. Also, list all the strategies that you know how to trade in that group. Finally, list the strategies you wish to learn that will fit within that group.

This will be a jumping-off point for how you will allocate your money, within your account, towards these groupings. It is a starting point for your portfolio design. Over time, this can and will change naturally as your skills change. It is possible that in your first few years your portfolio design will be limited to a handful of tactics that you focus on until you get them down.

You do not have to trade every strategy you are ever introduced to. In fact, it is best to keep it simple, identify a few strategies per group that you know, and then perfect the execution of those strategies through your practice, backtesting, and trading experience.

Spend some time today working on your portfolio design, review one that you have already built and/or ask a veteran trader or coach for input. It is important, and it is worth your time.

#TeamTackle


Chart of the Day: Portfolio Design – Cash Flow, Growth, Speculation

Portfolio Design – Cash Flow, Growth, Speculation

In the image above, you see a typical list of strategies, by groups Cash Flow, Growth, and Speculation. Your list could be similar to this but would include any other strategies you personally use and should remove any strategies that you don’t use or wish to use. Spend some time building your own portfolio design for your trading account.


Video of the day: Trading Concept Check: Portfolio Design

Watch this quick video tutorial to help you understand the concept of portfolio design. Having the proper portfolio design will take the guesswork out of asset allocation and position sizing by having you build your rules to become systematic in your approach.


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