Today’s musings will be a follow up to my latest Options Theory blog opining on the search for certainty. If you haven’t had the pleasure of reading it yet, do so. It lays the groundwork for the following commentary.

The tantalizing question I left you with was how to structure your portfolio, or how to make X per month.

A Simple Query

It’s a simple question that unfortunately, lacks a simple answer. Remember, once you enter the realm of risk-taking, certainty is taken off the table. Sowing your dough into stocks, options and the like carries higher potential returns, but higher risks. Unlike CDs and T-bills the outcomes are varied and diverse.

Suppose I have $100k and am seeking $1k a month or 12% a year. You’re not going to get an average annual return that high using any traditional methods. Throwing it in gold won’t do it. Nor will real estate (via REITS). Buying a diversified basket of stocks or bonds won’t get you that high either. Maybe some years will, but it won’t be the average. Not unless the future departs markedly from the past.

No, for low (or even high) double-digit returns you have to be proactive as a trader. You must be more engaged. Enter Pandora’s box.

Per Wikipedia, Pandora’s box is an idiom meaning “Any source of great an unexpected troubles.”

The quest to find the answer on how to invest the $100k to score $1k a month brings all sorts of issues. Chief among them is the fact that there are a million different ways to do it. Ask ten different traders who were able to score a 12% return last year the question and guess what? You’ll probably receive ten different answers.

But there will be some recurring themes. These are what I will present today to provide guidance – to combat the “unexpected troubles” that arise from such a seemingly simple query.

Theme One

All ten traders will have used strategies that they know how to make money with. Period. The End.

Maybe trader A was day trading in the FOREX market. Trader B used the S.T.E.P. system to swing trade stock. Trader C employed Cash Flow Condors. Trader D used covered calls and naked puts like Coach Mark’s boomerang system. Trader E scalped Futures. So on and so forth. I could come up with a million permutations.

And that’s assuming they only used one system each. Some may have had a more diversified approach involving multiple styles.

You can begin with the end in mind. Create a blueprint like that cleverly crafted in our S.T.E.P. video series that maps out the systems and strategies you want to use.

Or, let the portfolio structure rise organically as you start where you are and incrementally add new systems that you’re able to profit from. Along the way, you’ll try and discard some systems that you find you can’t profit from. Maybe you lack the skillset, or maybe it doesn’t fit your risk tolerance.

And that brings us to the next theme.

Theme Two

Each trader used a strategy that fit their risk tolerance, personality, and schedule.

Some systems require a higher risk tolerance, a more aggressive personality. Others are built for safety seeking tortoises with a sleepy disposition. Some require micromanagement and frequent monitoring. Others are hands-off. They can take care of themselves, thank you very much.

If you don’t take into account your schedule, the time you have available each day or week to trade, then you might struggle with consistently deploying your system or following your rules. Life will get in the way. I see this all the time during my one-on-one mentorship sessions. Trades go by the wayside; homework goes undone. Usually, it comes down to not prioritizing, but sometimes it’s because the student is trying a system that doesn’t fit their schedule.

Ultimately, this is something you discover over time through trial and error.

Theme Three

Each trader employs a system with the potential to hit their goals.

In financial planner jargon, we would say that each investor has a portfolio with the potential to meet their investment objectives. For example, if a traditional investor needs a 7% rate of growth, then you can’t put their entire portfolio in bonds. It lacks the firepower to get there. On the other hand, if the investor only needs a 3% rate of growth, then there’s no need to throw the whole thing in stocks. It’s more risky than necessary.

Some start with a goal, then identify the systems that have the potential to get them there. Let’s say the goal is 30% in a year. A more conservative strategy like covered calls would prove insufficient in achieving that. Not by itself, at least. You’d need a higher-octane play with higher potential returns. And, of course, the skillset to make said aggressive play work.

Others identify the strategies or systems they like and then set realistic goals based on what is typical. For example, maybe they fall in love with covered calls and discover 8% to 16% is an appropriate target to shoot for.

Let’s button this up. These are the three recurring themes used by traders to tackle the simple, yet challenging question of portfolio structure.

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