Build a portfolio philosophy
While building a portfolio we should decide before hand as to how we will go about thinking when it comes to acting upon it. Answer the following questions, and at the end of it you’ be able to formulate some rules for yourself.
Will I be a HODLer or will I be a trader?
[Attention: If you are a pure trader, you don’t need a portfolio! So this article/form won’t help you much. I am not one of those who propounds one way as better than the other. There are many people out there who shit on trading, but I’ve seen great traders and great investors. These are two separate beasts, neither is objectively better than the other. However, trading takes away your night’s sleep, but hey not all of us need sleep! I, for example, am both a HODL-er and a Trader. Happy trading!]
Will it be a risk averse or an aggressive portfolio?
[Depending on the answer, define what %age of safe coins (established ones such as ETH, BTC, XRP) that will be there and the %age of untested coins (those that are very new, ICOs, very small market cap)]
Will I analyze each coin to the minutest of details or will I sweep in immediately upon listening to the faintest of rumors and then analyze?
What is the one criteria that must be fulfilled before jumping in on a coin?
What is the maximum number of different coins that should be in my portfolio?
What is the maximum loss that I will bear before closing my positions?
[Hint: Understand this, if you have 100 units of fiat. A loss of 99% will take your capital to 1. And to get back up to 100, you will have to have a profit of 10,000%! A 99% loss corresponds to a 10,000% profit, imagine that! So the more losses you take, the better you’ll have to perform to win back your capital! It is not a 1:1 scenario]
What is my portfolio allocation strategy?
[Description: This question is for advanced investors. One needs a stable portfolio, and wants to reduce volatility. Sometimes one sacrifices on gains to reduce volatility and sometimes it’s the other way round. There are many systems out there, such as the Markowitz portfolio allocation theory, I will write about that later.]
What is your portfolio review period?
[Description: A comprehensive review, in my case it is 15 days]
Most important: What is the total value of my portfolio now in fiat, and how much capital, again in fiat, has been invested in it? By what %age is it in profit or loss?
[Note: You do not have to answer the above question, I don’t really want to know how rich you are. But this question is important because of the same reason why it is important for a foot soldier in a warzone to know at all times the number of bullets he has in reserve. You cannot go into a firefight without knowing how much ammo you have, how much ammo you’ve used and how much ammo you have left. I can’t explain why it helps you, but after I adopted this strategy, my performance in the markets has improved considerably. So if at any time during the day, anyone asks you what is the value of your portfolio and by what %age it is up or down, you should have an answer instantaneously. I don’t mean that you should constantly go about checking and rechecking your portfolio, what I am saying is that you should be able to answer for a point of time in the same day. If you’re saying, “Today, at 9 AM, my portfolio was X, up by Y%.” X and Y may vary, but ‘Today’ must be a constant.]
Some FAQs about the article above:
What about diversification?
Diversification is for the weak! Actually if you look at your portfolio, you’ll find many coins that have performed very well, and some that have just stayed there, if it hasn’t already gone in the red. Diversification is what lazy people adopt as a substitute for knowledge. Pareto principle suggests that 20% of your holdings will be responsible for 80% of your profits. So why hold on to those 80% coins that give you little to no profit. As it is I’d recommend you to hold 5-10 stocks in your portfolio. Anything beyond is an overkill.
What happens if I already have 10 [Your Choice Number] coins and I feel there is another great coin out there?
You look at your current holdings, and the one you are contemplating. You pick out the weak link from your portfolio and replace it with the new one. Never go on increasing the type of coins you hold, because once you do that, you’ll end up holding 30 different coins, and have no idea what most of them are for!
How to reduce volatility without increasing the number of stocks?
Study Markowitz Portfolio Allocation theory! If it is too tedious I will write a simple version of it for you guys later on.
What criteria are you talking about? Crypto don’t have no criteria! It’s just FOMO!
No, there are criteria, everything has criteria. I personally always make sure that the person backing it is someone who has a lot of achievements in the past.
For example, the guy who founded Tron, Justin Sun was selected for Forbes Asia, 30 under 30 list. He has also worked with Jack Ma, who is sort of a mentor to him, during the early stages of Alibaba. Now these people tend to have connections, have you ever seen a rich guy’s venture fail? They always find someone or the other, be that a VC or a PE bail them out. Since their network is so rich, it is also that much easy for them to connect to prominent VCs and seek out funding! I mean hey, all this guy needs to do is send a msg to Jack Ma on whatever messenger these rich people use, and Jack Ma can just dial Masayoshi Son of Softbank in 1 sec and boom, a meeting has been set up and funding has been had! Compare that to a relatively unknown founder! When I saw Tron it was already going up like crazy, I had to ascertain what to do! Should I analyze it? Or submit to FOMO & get in! One google search about the founder was enough to convince me to get in, I then could take all the time in the world to analyze it. So your 1 absolute criteria before you get in needs to be there with you to stay atop of FOMO. Ideally, this criteria should be very easy to verify, like the present investor’s/founder’s background etc, and not some technical specifications. As entrepreneurs say, it is not the idea that is worth money, it is the execution! And execution is always dependent on human factors.
So my thoughts on the matter, which encapsulates all that I just said are: Always have a reason for doing what you are doing. If I ask you why you have a particular stock in your portfolio or why do you have 5 stocks in your portfolio instead of 10, you should always have a reason. Not something like, hey it was going up! That’s FOMO reason, that won’t work. Even trivial reasons apart from FOMO ones will work, for example even if you say, ‘John McAfee tweeted about this coin, and judging by his past record, many of his coins have done well!’ I’d still be satisfied, but doing something for no reason at all, just means that you are not using the greatest gift given to us: our brains!