In this episode:
- I will share some concepts regarding portfolio building for active traders – so if you’re an active trader, I want to share with you some insight about building out your portfolio or just overall looking at your portfolio
- It’s going to be a little bit different than the last couple of weeks, as far as looking at the markets and recaps, so this is what I want to do
Looking at the basics of portfolios
- A portfolio is a basket of your investments
- This can be a combination of real estate, stocks, ETFs, rare paintings, or a brick of gold – it can be multiple of these things
- Diversifying your investments can help you survive when one of your investments gets in trouble
That’s the whole point or goal behind a portfolio.
Looking at a stock portfolio specifically
- The stock portfolio should contain a mix of investments
- Often people diversified by buying multiple stocks or ETFs
- However, here’s the caveat for active traders, is that active traders typically forget this concept and want to trade every single thing that they have within their capital amount
This can be a huge mistake if you’re an active trader.
What I’m saying here is if you’re an active trader and you’re putting all your eggs in one basket, that’s a huge and big mistake.
The reason I say this is that overall your wealth portfolio and I’m talking about your overall financial kind of plan should be reasonably diversified. You might have some real estate. You might have some stocks. You might have a gold brick in your house or under your mattress or at the bank, whatever it is the case. You have a wide array or a lot of different things to your wealth, your investments. This, of course, is after you’ve already accumulated and are making some money. If you’re still living paycheck to paycheck, it makes it a lot more difficult.
What people typically want to try to do is become an active investor. They save up one or two thousand dollars, and then they want to go ahead and now day trade penny stocks, and I think I’m going to be rich from that or I guess I’ll make my year or entirely change my life around. That’s difficult because wealth building is much slower than that. Instead, the better approach is to allocate two things in segments; you put a little in real estate, you put a little bit in stocks, you put a little bit in gold, whatever the case may be.
If you don’t want to deal with real estate or the headaches with real estate or you’re more you know free on your location, and you want to do stocks only, then again, you should mix those things up a little bit more.
Here’s a little portfolio breakdown for you
This is an essential pyramid kind of concept. You have your long-term investments in stocks – about 50% of your chunk or your capital. If you’re an active trader, the remaining 50% could be all to actual trading amounts. Let’s say you have $50,000. $25,000 is in long-term investments – it could be passive dividend-related investments, it could be passive dividend ETFs, Then the remaining 50% might be medium-term trades and speculative trades; so it could be penny stocks, it could be day trading, it could be option trading, whatever the case may be for you.
Some people that I coach and mentor may do medium-term trades, 30 to 60 days. It could be with options; it could be swing trading. This is where part of their capital, let’s say about 33% will go.
Now for other people who like to do a little more speculative trading, let’s say penny stocks or things that move real quickly could be biotechs, then maybe 17% of your capital would go to the risky trades.
But you can see that I don’t put a hundred percent of my money that’s invested all in speculative or all in medium-term or all in long-term. You’re slowly diversifying things.
This pyramid, of course, can shift with time, so if we eventually let’s say get a little bit older, and we want a safer place, that medium-term and the short-term will maybe grow a little bit and the speculative part we might chop off. As you continue to age and you want even more safety net when it comes to your investments, that longer-term passive dividend investing concept could grow even further. So from 50% you might go to 60%, from 60% you might go to 75% or 80%, and then the remaining could be swing trading or options trading. It could be multi-month holds but then all of a sudden you might not be doing speculative trades or investment.
As you can see, you’re slowly adjusting the pyramid based on your risk levels – based on your wealth concept, mindsets and what you can handle. Because for everybody it’s different. It’s not about taking your $10,000 and turning it into a million dollars because that’s an all-in approach. Instead, the better approach is the slow and steady, where you’re diversified because what if something does go wrong with that initial investment or without one investment then all of your money everything is just gone.
This is why you diversify. This is why you spread your risk out through multiple investments or different areas of investments and even in the stock market from long-term holds to medium-term holds, to speculative trades. If you want to break it down a little bit differently, then that’s perfectly okay because if you’re younger, you could, of course, do 50% speculative, you could do 30% medium-term, and the remaining long-term or a passive approach.
Here’s another little diagram that I want to share with you
Maybe this will help for those of you that have enough money to live on a day-to-day basis, which is active traders.
Think of it this way, well what are you doing with that money that you’re earning from those active trades? For some people what they do is they take the short-term trades, they put it more into medium-term trades. They’ll make the medium-term trades, and they’ll put those into the longer-term trade. So you’re slowly creating a cycle where this becomes its own little business, where the short-term trades feed those medium-term trades, and the medium-term trades supply the long-term trade.
You continue and loop this back, time and time again, so that way that business steadily grows its assets and grows its value. You continue to improve and increase your holdings on the longer-term investments.
What most people do as far as active trading goes when you look at own day trading, or you choose one type of method of trading, they look at it regarding one cup. They have one cup – they want to fill up that cup, and that’s what they try to do. They go ahead, and they want to fill up their whole wealth with one container. But the better approach, of course, is to have multiple cups.
You’re slowly filling things up with these different mediums. So if you have one that’s longer-term, one that shorter-term, and you have these different baskets and different assets or different asset classes – it could be stocks, swing trading day trading, penny stocks, it doesn’t matter what you like to invest in. What matters is the risk associated with it, and you have all these different cups that you put your money into.
As you place your money into these different cups, they slowly grow. Individual cups are more fragile, and they may break, just like with higher risk investments, and other things are a little more stable. They go ahead and sustain things for the long haul.