Do you have structure?

I'm quite a disorganized person. I also procrastinate and manage time poorly which is a perfect recipe for being tardy. These are probably the biggest flaws I have as a person which I know I must and can improve on. These flaws account for at least 80%of the times that my wife gets pissed at me. I'm very instinctive/intuitive and I believe that these flaws could be a side effect of this. But it's not a good excuse. Bad habits are the bigger culprit. I don't know exactly how they started but they did.

At one point these flaws I had infected my portfolio. I had no structure, no game plan. I would trade/invest by the seat of my pants. When I decided to do this full time I knew I had to be more serious and put in place a structure. Everyone should have some sort of rules/guidelines to go by when investing. I personally believe such rules should change when markets change i.e. 1 set of rules in a bull market and another in a bear market. Bull markets and bear markets are 2 different animals...pun intended. In bull markets I learned the best strategy is primarily buy and hold and trade sparingly. Stock picking is important if you want to make the really big gains. In bear markets it's all about market timing the big swings. It's best to stick with trading indices both on the long and short side and don't buy and hold anything except for cash and fixed income.

Getting back to rules...it's important to have them because it keeps you out of trouble. It helps prevent your emotions and ego getting the better of you. Not only that, but it keeps you from being accidently overexposed to one particular position/sector, keeps you on course to following the strategy you have in place and helps prevents hesitation/indecision.

My goal is to achieve 40%+ annual returns and therefore the rules I have in place are designed for such a goal. The following are the rules I have in place pertaining to Money Management during bull market conditions.

Rules for Stocks, ETFs and Deep in the Money Options

• Maximum concentration in any 1 sector = 35%
• Maximum total capital committed = 85% (always keep at least 15% cash on hand)
• Maximum capital committed to any 1 position = 20%
• Minimum holdings when fully invested = 5 positions
• Maximum holdings when fully invested = 12 positions

Rules for OTM/ATM Options

• Buy only in direction of well established trend (no bottom/top picking) except for hedging purposes
• Must have at least 45 days to expiration
• Max capital per non-index play = 3.5%
• Max capital per index play = 5% (10% if used for hedging)
• Total max capital for OTM/ATM plays = 10%

Position Building with Stocks, ETFs and Deep in the Money Options

• Initial position size = 3.5 - 7.5% of capital
• Add additional 3.5 - 7.5% of capital (to max of 20% total) only when showing profit with position

Position Management for Microcap stocks (stocks < $2) and OTM/ATM Options

• Stops usually not used
• Must not take profits until at least 100% gain
• Must take at least 35% profit after 200% gain
• Consider dumping non performing position after 6 months (stocks only)
• Allow non preforming position maximum 12 months to perform before dumping (stocks only)

Position Management for Small/Midcap stocks (stocks between $2-10) and Deep in the Money Options

• May or may not use stops (depending on context)
• Must not take profit until at least 50% gain
• Must take at least 50% profit after 200% gain
• Consider dumping non performing position after 6 months
• Allow non preforming position maximum 12 months to perform before dumping

You will notice that some of these rules are not really rules but rather guidelines. That's because I believe every situation is unique, not suitable for hard and fast rules and it also gives my intuitiveness/instincts "room" to do it's thing. But some things such as the first 5 points are unbreakable rules for me. You will also notice that I don't always require the use of stops. That doesn't mean I won't ever bail on a losing position. I will if appropriate. Also, by not committing the full intended capital on a position on my first trade and only adding to it if it shows a profit, that in a sense is like using a stop, because if my initial entry shows a loss I am not allowed to add to it and so a loss on that starter position even if severe won't be large on a percentage of portfolio basis. By not having a hard stop on your small initial position, it allows the position plenty of opportunity to prove itself reducing whipsaws. As you can see I don't average down only up. I only reward good behavior not bad.

Everyone has their own unique goals, time horizon, risk tolerance, market outlook and opinions therefore everyone should have their own unique set of rules/guidelines for their portfolios. Just make sure you have something.