Position Sizing for Practitioners [Part 3: A Portfolio Approach]

“Diversification is the Only Free Lunch”

I’m sure everyone has heard this old adage at some point in their trading career. Most people probably shrug it off and go back to watching The Big Short and dreaming of putting on that one career-making trade. Or maybe they’re still trying to figure out how to pick every single top and bottom on one instrument, thinking all they need is that one perfect strategy. The idea of concentrated bets and being right is just so sexy. Compare this to trading a basket of strategies across styles, time frames, and asset classes. Hopefully the thought alone hasn’t bored you to sleep. Because what I hope to prove with this post is that diversification can combine multiple small edges into a portfolio with both reduced risk AND increased reward . This was a true turning point in how I thought about trading, and hopefully it will be for you too.

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Position Sizing for Practitioners [Part 2: Dealing with Drawdown]

The Problem with Optimal f

What does “optimal” mean, anyway? In the first part of this series, we discovered that the staked fraction of capital that yields the greatest compounded returns also yields a less-than-optimal level of drawdown.  To realize the greatest return on capital, an investor in SPY since its inception should have used over 3x leverage to buy in. This would have yielded the greatest compounded rate of return, but would have induced a 97% (!!!) max drawdown along the way. Since a 20% retracement from peak equity causes most investors to start tossing in their sleep, this approach doesn’t seem very realistic. This post will help traders maximize their gains while still getting their beauty rest!

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