Creating a Portfolio
Look, when it comes to money
management and trading, most (like 95%) of traders have no clue
about what they're doing. Trading isn't really about winning and
losing. Trading is all about the ratio of how much you make vs.
the worst drawdown you can stand.
For example, I could make 1000%
a year if I was willing to experience a 90% drawdown in my
account. Could I stomach that? Not a chance. In fact, it's well
known in money management circles that anything more than 10%
starts getting clients bitchy...to the point where more than one
person calls up and complains.
My personal penchant for risk
is a 30% drawdown. What's yours? I have no idea. Only you can
answer that. Not even a certified financial adviser can really
answer that one (which is why I see very little use for
one...but hey, that's just me).
People ask me all
the time how much to put in this stock or that position. I can't
answer that. For one, the US government does not allow it. It's
illegal to give personal advice without a license. That's fine
by me. I wouldn't know if you're part of the crowd that gets
their feathers ruffled at 10% or if you're super aggressive and
can take a 50% drawdown.
I believe the only
way to really know is to actually start trading with real money.
Start low, and then see what happens over the course of a year.
Believe me, paper trading and real trading are completely
different. It's easy to get discouraged after taking a big loss.
"Big" is a relative term in this game though.
With that in mind,
here's a sample portfolio using SP Slugger and Opportunity
together. The results are hypothetical, but should give you an
idea of the gains that could be made on a small portfolio (< $1
million). As a portfolio becomes large, it starts to affect the
market...I know, what a problem to have ;-)
SP Slugger
with Opportunity Day Trader
The CAGR
(reinvesting profits) of both systems combined is almost 200% a
year. The maximum drawdown it took to make that much was 30%.
That's over a 6:1 ratio which is almost unheard of over this
much time (1997-2009).
In order to make
these kind of gains, you MUST position size correctly. If you're
an "all in" trader, you're going to lose. I've seen it several
times: My SP Slugger system hits more than 10 wins in a row. A
client puts everything into the next trade. He loses. He quits.
Another gambler loses with an 85% winning strategy. Don't gamble
your money away...you must keep hitting base hits instead of
looking for homeruns.
If you read the
descriptions for SP Slugger and Opportunity, you will notice
that I provide exact percentages. That's a start. If you're very
risk adverse, you might want to cut that amount to 1/3. Again,
if you're looking for that homerun, you should just put your
money in a money market account and walk away. Otherwise, you're
just going to piss it away.
To sum up how to
build a simple portfolio: you must first know what kind of risk
you can handle. Usually, the older you are, the less you're
willing to lose. If you're still jumping out of airplanes at 70,
then you might be different from the masses.
Next, you must
follow the money management suggestion I give and then apply
that to your account. If you want to risk less, cut that number
by 50% or more. If you want to risk a great deal, multiply it by
50%. If you can't sleep at night, or you find yourself checking
quotes all the time, you're risking too much.
Hope that helps!
*The results listed herein are based on hypothetical trades.
Plainly speaking, these trades were not actually executed. Hypothetical or
simulated performance results have certain inherent limitations. Unlike an
actual performance record, simulated results do not represent actual trading.
Also, since the trades have not actually been executed, the results may have
under (or over) compensated for the impact, if any, of certain market factors
such as lack of liquidity. You may have done better or worse than the results
portrayed.
