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Introduction to How to Manage Your Portfolio and Various Investing Strategies.

Overview:

There are many different ways in which you can manage your portfolio depending on
your investment style. Different organizations of portfolios may reduce risk, increase reward, or
be more fit to your investment strategy. Here, I will cover some basic concepts:

How Should I Manage My Portfolio?

Diversification:

What Is It?
By diversifying, you put your total
amount of money into many different
stocks instead of just a single one, usually
also within different industries.
Why Do It?
Diversification can help you to limit your losses from unexpected crashes within a certain
industry, or within a certain stock. Your losses are limited because your capital is spread out
between many assets, and you may only have a small percentage of your total cash into a certain
stock or industry. So as a result, if a single stock goes to zero for example, then you may only be
losing 0.5% of your portfolio. On top of that, another benefit of diversification is that although
some of your stocks may be going down, some of your other stocks may be going up, and your
losses and gains are averaged out. The least risk that you can have in a portfolio is the market
risk, or the correlation between your assets. The more you
diversify, the less risk you have, and the less correlated your
assets are, the less risk.
Is It For Me?
Diversification is a way to limit your risk, but it may
also limit your reward. Diversification is likely for you if you
want to protect your capital, want to reduce volatility, are not
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100% sure about your stocks individually, or are seeking more stable and modest gains.
Diversification can help you to limit your losses from unexpected crashes within a certain
industry, or within a certain stock. However, if you are looking to aggressively build your wealth,
or are extremely confident in the stock that you are investing in, then diversification is likely not
for you.

Putting All Your Eggs In One

Basket (Concentration):

What Is It?
Concentration (putting all your eggs
in one basket) is the opposite of
diversification. You select a few
stocks or assets to put your money
into, and just stick with those. In
diversification where one stock may
only make up a maximum of 10%
(generally) of your portfolio, while investing in more targeted stocks, one stock (or other asset)
may make up your entire portfolio.

Why Do It?
Although putting all your eggs into one basket may sound counterproductive according to
general wisdom, it in fact may even be better than diversification in some cases. Because of how
diversification can limit volatility, it may also limit upside volatility. With diversification, half of
your stocks might be weighing down your portfolio value, while the other half may be going to
the moon. If you would have just put all of your money into your best performing stock, then you
may have made back triple or quadruple of what you made
with your diversified portfolio. Infact, many investing
billionaires like Warren Buffett and Mark Cuban are strictly
against diversification, stating that you should “put all your
eggs in one basket, then watch the basket.” As illustrated by
the image to the right, if you can get it right, concentration
(“ultimate stonks”) can provide higher returns than
diversification (“normal stonks”).
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Is It For Me?
While a more singular investment approach may sound enticing, it is important to note
your investing skill level, expertise, experience, and risk tolerance. Although investing in one
stock may easily provide massive returns, it is important to remember that it can also equally
easily wipe out your entire account. Warren Buffett has quoted that “diversification protects
against ignorance. It makes little sense if you know what you are doing.” Although this may
sound good, you have to note that a very large amount of investors do not know what they are
doing (and thus diversification is the route for them), and have very limited understandings
concerning the mechanics behind good business, business disruption, or the financial markets,
and also have almost no experience.
Warren Buffett also repeatedly suggests
that we should only invest in what we
understand, and most people do not
understand much of anything concerning
investing or business. However, if you
think that you have the expertise
(knowledge and experience) to take on
the financial markets head on, then
concentration is definitely the best
strategy for you. For those who are not
too sure about investing however, here is
a very brief introduction to some of the most popular investing strategies:

Investing Strategies:

Value Investing:

This is the type of investment strategy that Warren Buffett uses. Value investing is where
you find stock that you find is undervalued, and invest in it. The companies here are
usually less popular, and not in the tech industry.
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Disruption Investing:

Although this name is unofficial, it captures the general idea of this type of investing. The
currently trending Cathie Wood uses this strategy. This strategy is all about finding
companies whose products you think are innovative, and you think will “disrupt” and
industry. These stocks tend to be more like hype and momentum stocks, usually in the
tech or biopharma sectors. Cathy Wood uses many models concerning business growth
and product development, tracking the spread of innovation, the product life cycles, etc.

The Trading of Financial Instruments (Stock Trading):

The trading of financial instruments is where you buy an asset, hold them for a certain
shorter period of time, and then sell them. Depending on the trading style, you may hold
your assets for different amounts of time. For example, day traders hold stocks for no
longer than one day, swing traders hold their stocks from 2 days to 1 year (also depending
on varying definitions), and scalpers hold their stocks for just a few seconds. Trading
usually provides higher percentage returns than investing, but requires more time, is
much riskier, and also is an
entirely different beast to conquer.
There are many different assets
that you can trade, many different
trading strategies, and many more
factors that you will need to pay
attention to. Such factors include
HFT’s, darkpools, expiration dates,
time frames, market manipulation,
short term volatility, order sizes,
and other strategy specific events. Some strategies include momentum trading and
catalyst trading. Stocks, derivatives, currencies, and cryptos can all be traded.

It is important to note that all investment strategies are subjective, and that there is no one
“best strategy.” It all depends on your expertise, risk tolerance, and personal preferences. There is
a strategy that best fits each person, and you should make sure to not just pick the same strategy
as your favorite investor. I am also willing to elaborate more on different investing and trading
strategies in the future.