How Do I Build A Portfolio?

Building a Portfolio The Right Way is Not What You Think…

You know that sinking feeling when you mess up on a trade?  That one when you put all your eggs in one basket and something turned the basket upside down and all the eggs are splattered?  Yes, if you're a trader, you know that feeling because we've all been there, done that, felt the pain and then said, how do I make sure that never happens again?

How do I build a portfolio?  Not just any portfolio but a portfolio that is robust enough to stand the shocks of a market crash, a stock crash, a bubble and a bust.

The first step is to re-define what things mean, like when you say I'm bullish on the market.  Does that mean  you're 100% bullish?  Does it mean all your positions are bullish?  If that's what being bullish means to you then you've probably got a problem because when the downturn comes, every position will hurt and everything will feel painful.

Instead, it's worth thinking about being bullish as having a maximum ratio of bullish to bearish positions, which might be 70/30 or, if more aggressive, 80/20.  Either way, it's not 100/0.  That's just dumb.  It's dumb because it doesn't factor in the risk of an exogenous shock, an unexpected news event and a gap lower.

If you ever in your entire life had anything unforeseen (and bad) happen to you then you should be humble enough to expect that something bad could happen in the stock market too.  So prepare for it AHEAD OF TIME.

A bullish portfolio then means a majority of bullish position AND some bearish positions.  A bearish portfolio equally means a majority of bearish positions AND some bullish positions.

It could be as simple as bullish stock positions and index put options.  The permutations and combinations are covered in much greater detail at

The bottom line is re-evaluate your definitions of bullish and bearish.   The market won't always move as expected and you need to be prepared for the unexpected.  Sure, being hedged always will limit performance to an extent, but much better to give up a few bucks on the upside to protect a much greater risk to the downside.

Start today by looking at your portfolio.  Do it right NOW.  What is the percentage of bullish positions and what is the percentage of bearish?  Does that ratio confirm with your ability to tolerate the downside risk?  Seriously, does it?  What if all those bullish positions dropped 30%, what would it do to your portfolio?

For those of you looking to get started, go ahead and click here to see how how make your first $1,000 trading options.




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