Let's talk about position sizing, I often get asked about it, and ofc there is no 'right' answer, however a few rough ideas might help you think thru the dynamics
H/T to @KeithMcCullough @RaoulGMI @apollotradingsd @HedgeyeDDale @MetreSteven @chigrl for nuggets over time!
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H/T to @KeithMcCullough @RaoulGMI @apollotradingsd @HedgeyeDDale @MetreSteven @chigrl for nuggets over time!
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When I was a VC @atomico I used to joke that a famous B. Franklin quote was wrong:
"...nothing is certain except death, taxes, AND cap tables have to add to 100%"
The 4th is your P.A. allocations must = 100% of liquid investable assets if one includes cash
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"...nothing is certain except death, taxes, AND cap tables have to add to 100%"
The 4th is your P.A. allocations must = 100% of liquid investable assets if one includes cash
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So let's not talk about asset allocations, but instead about position sizing (v. much related)
Once you decide to make an investment, how much should you invest as a $ of your NAV?
There is no right answer, but let's look at some rough rules of thumb for Stocks & Options
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Once you decide to make an investment, how much should you invest as a $ of your NAV?
There is no right answer, but let's look at some rough rules of thumb for Stocks & Options
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Single stocks:
Unless you are a founder/early employee of a company that went public, you probably don't want to have more than c. 4%; it's volatile; although if you held $AMZ for 10 years this might be tricky, but still good to consider taking profits to reduce exposure
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Unless you are a founder/early employee of a company that went public, you probably don't want to have more than c. 4%; it's volatile; although if you held $AMZ for 10 years this might be tricky, but still good to consider taking profits to reduce exposure
4/N
Sector/Factor exposures:
ETFs like $XLK $SDY are v. popular, they generally have less volatility than individual stocks, so up to 6-8% is sensible, many have gone significantly above this in $XLK (or $QQQ) recently, make an exception if you want to, but beware of the risk!
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ETFs like $XLK $SDY are v. popular, they generally have less volatility than individual stocks, so up to 6-8% is sensible, many have gone significantly above this in $XLK (or $QQQ) recently, make an exception if you want to, but beware of the risk!
5/N
Indicies:
This is much more controversial, many investors would put 30-50% in SPY and think that is fine, however perhaps consider diversifying that risk into smaller chunks as then the ups and downs allow for better periodic rebalancing
...
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This is much more controversial, many investors would put 30-50% in SPY and think that is fine, however perhaps consider diversifying that risk into smaller chunks as then the ups and downs allow for better periodic rebalancing
...
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Indicies (cont.):
E.g. 10% in SPY, 10% in QQQ, 10% in RTY, 10% in EEM (an EM Index)
This will give more granular control and if you want to trade risk ranges, or rebalance regularly should give more flexibility 💪
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E.g. 10% in SPY, 10% in QQQ, 10% in RTY, 10% in EEM (an EM Index)
This will give more granular control and if you want to trade risk ranges, or rebalance regularly should give more flexibility 💪
7/N
Bonds:
Treasuries (or other Dev. Gov bonds) are lower vol, so allocations can be larger, and if your thesis is 'super long duration' you might have 50%+ across several ETFs
But in absence of such a thesis, up to 15-20% in stuff like $TLT is ok for most retail portfolios
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Treasuries (or other Dev. Gov bonds) are lower vol, so allocations can be larger, and if your thesis is 'super long duration' you might have 50%+ across several ETFs
But in absence of such a thesis, up to 15-20% in stuff like $TLT is ok for most retail portfolios
8/N
Bonds (cont.):
Corp bonds, even IG ($LQD) , have higher vol, so scale back positions to significantly less than UST's, e.g. 10% max, and perhaps only 5% max in HY (e.g. $JNK)
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Corp bonds, even IG ($LQD) , have higher vol, so scale back positions to significantly less than UST's, e.g. 10% max, and perhaps only 5% max in HY (e.g. $JNK)
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Commodities:
Whether it's roll yields (e.g. USO) or investing in Futures and not really understanding the market, C's are a graveyard for retail investors, so be careful!
If you are going above 2-3% in a single C then please ensure you know what you are doing, C's = VOL!
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Whether it's roll yields (e.g. USO) or investing in Futures and not really understanding the market, C's are a graveyard for retail investors, so be careful!
If you are going above 2-3% in a single C then please ensure you know what you are doing, C's = VOL!
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PM:
Gold is really a currency from a vol perspective (i.e. v. low) so allocations of 20%, even 25% can work
Silver is an industrial metal / pseudo-PM, vol is far higher than gold, it's another trade that wrecks many, I'd suggest being cautious, 5% max
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Gold is really a currency from a vol perspective (i.e. v. low) so allocations of 20%, even 25% can work
Silver is an industrial metal / pseudo-PM, vol is far higher than gold, it's another trade that wrecks many, I'd suggest being cautious, 5% max
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Options:
"85% of options trades lose money" - an oft quoted stat
Most simple options trades (i.e. buying calls or puts) that are significantly OTM (i.e. >10%) will result in a 0. So be prepared for that and size accordingly!
I like to use a conviction scale:
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"85% of options trades lose money" - an oft quoted stat
Most simple options trades (i.e. buying calls or puts) that are significantly OTM (i.e. >10%) will result in a 0. So be prepared for that and size accordingly!
I like to use a conviction scale:
...
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Options (cont.):
Super high conviction (v. rare): 5%, perhaps 10% if literally the trade of a LIFETIME
High conviction (rare): 1-2%
'Taking a punt' conviction (common): 0.1-0.5%
If u put 10% in 1 options trade u need to be mentally tough, and prepared to lose all of it
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Super high conviction (v. rare): 5%, perhaps 10% if literally the trade of a LIFETIME
High conviction (rare): 1-2%
'Taking a punt' conviction (common): 0.1-0.5%
If u put 10% in 1 options trade u need to be mentally tough, and prepared to lose all of it
13/N
FX:
Generally the lowest vol, however also a tough market to trade consistently well, but there are many who keep large allocations to core currencies (e.g. USD, EUR, JPY, GBP, CHF, AUD etc); some keep 50% of their portfolio in cash, waiting to pounce
...
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Generally the lowest vol, however also a tough market to trade consistently well, but there are many who keep large allocations to core currencies (e.g. USD, EUR, JPY, GBP, CHF, AUD etc); some keep 50% of their portfolio in cash, waiting to pounce
...
14/N
FX (cont.):
Don't worry about 'making the capital work', having dry powder in volatile times is important, and remember fund managers cannot have much dry powder, so the retail investor has a rare advantage here!
Flexibility = optionality
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Don't worry about 'making the capital work', having dry powder in volatile times is important, and remember fund managers cannot have much dry powder, so the retail investor has a rare advantage here!
Flexibility = optionality
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So how about entering positions, some people just do it all at once, and in the days of high trading fees this made sense
However, now most can trade for free / v. little, so entering maybe 50bps at a time is doable
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However, now most can trade for free / v. little, so entering maybe 50bps at a time is doable
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If you want to get to a large position, say 20% NAV, then many would not just buy it all in one go, unless there was a major catalyst (e.g. price dump to -15% of NAV for an ETF)
Some take months to build positions, even years; patience is your friend, learn to be patient
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Some take months to build positions, even years; patience is your friend, learn to be patient
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Getting out is similar, although it's a bit more common to just 'get out' if a target is met; and this is fine if a catalyst occurred, but if it's a general trade like 'long gold' atm, considering scaling out slowly too, if it's good you can take profits slowly
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For those selling options and using more advanced structures this is not meant to help you at all, you should have appropriate risk mgmt in place and have the experience to 'get' it
But for those newer to trading, having some rough rules of thumb can be helpful
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But for those newer to trading, having some rough rules of thumb can be helpful
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Whatever rules you come up with for you, stick to them, give yourself discipline, be patient, don't get sucked into FOMO
This thread is just ideas, many will violently disagree with some of them, but as is common in investing, you have to find what works for you
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This thread is just ideas, many will violently disagree with some of them, but as is common in investing, you have to find what works for you
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So ask people you know in RL, people you respect; even ask people on Twitter (probs via DM) to test what you think your own rules should be
Talking it over with others is a good way to sense check whether they are logical for you (that's what matters)
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Talking it over with others is a good way to sense check whether they are logical for you (that's what matters)
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If the world changes, then considering changing your rules too, I would suggest not to too often, but the world is dynamic and non-linear
Best of luck, it's a tough and hard market, give yourself every advantage you can!
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Best of luck, it's a tough and hard market, give yourself every advantage you can!
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What do you think? What are your rules of thumb?
Do you think this thread is insane and stupid? If so, how do you think of this important topic?
Would love to get other opinions on this, as I said, there is no right answer
FIN
Do you think this thread is insane and stupid? If so, how do you think of this important topic?
Would love to get other opinions on this, as I said, there is no right answer
FIN
