Portfolio Management

This is my personal philosophy on portfolio management, and like the Portfolio Allocation section, there are a lot of ways to be successful here. There are plenty of people I respect who would whole heartedly disagree with one, or multiple points below.

So, please follow the advice of the one-and-only Bruce Lee, and “absorb what is useful, discard what is not, and add what is uniquely your own.” Also, I’ll add to please only do things that both make sense to you and help you sleep well at night! 🙂

Portfolio Management

Part 1: When should I buy?

Remember: you’re never going to time it right, so don’t waste too much time trying. The safest and most sensible way is to Dollar Cost Average, which just means making consistent, incremental purchases into your positions. Some days will be up, some days will be down, but you’ll get an average purchase price across that period of time.

Start small to get a feel for how things work! Even just your first $50 purchase can be an invaluable learning experience. Experience in crypto is something you can’t buy, and will pay you dividends with time.

Side note: You should be more cautious about your buys when hype and retail buying is at its highest (remember the Market Manipulation page), but that does not mean to just sit on the sidelines for years waiting for the “right time”. Better to buy at the wrong time and hold through a bear market until it pays off than to sit on the sidelines and never get in the game at all. Even if you’d bought in at the worst possible time in 2017, at the height of the bubble, if you’d just held onto quality investments like Bitcoin & Ethereum, you’d still be sitting on some incredible gains in 2021.

Time in the market beats timing the market!

As a caveat: Know there is a weird universal law that seems to state: “whenever you decide to make a big purchase, the market is probably going to crash the day after you buy”. 😉 This is ok, and is something to laugh about, not stress about. This is typically due to short term manipulation and is a problem for traders, not long term investors. Remember, these are bumps in the road, and if your thesis is right in the long term, you won’t care whether you paid a little more or less for the asset when you bought it.

Part 2: Should I rebalance my portfolio?

Once you’ve made your bets, there are many ways to effectively manage a portfolio, but typically with a long term portfolio… the best way to manage it is to not mess with it!! Oftentimes, one of the biggest questions I get is “should I rebalance when one crypto over performs, or under performs?” You’ll often see people worry more about this when one of their bets actually does really well, and they wonder if they should sell some to even things back out. When something is working, we as human beings all have a tendency to try to mess with it…

There are a handful of reasons that do make sense to rebalance periodically. If you’re looking to prioritize stability, or want to be more conservative, then sure thing — go for it. As I’ve said, I’m a big believer in doing what helps you sleep well at night. Also, if it’s a situation where you are not highly confident in the bet, or it’s clear the market is way overextended, then absolutely, take some profits. (I.E. you took a risky bet, and it worked out well for you, but you aren’t sure it’ll be around in 5 years… or, if the market just went insane, got way overpriced and it’s clear we’re in for some pain, then YES, please take some profits if you feel you should).

However, if you’re in this for the long haul, are still highly confident in the project, are able to take risks with your capital and are trying to really build wealth… rebalancing is probably a bad idea. Reason being, you need certain things to wildly outperform if you want to maximize your returns, and that means your asset allocation will probably get totally out of balance. Things aren’t ever going to appreciate evenly, and over performance is a good “problem” to have! Remember, when you take money from a great performing investment and put it into a poorly performing one to “even things out”, you are effectively taking from a winner to give to a loser, often hurting your total overall return. So, my personal approach here would be:

Cut your losses when you know you’re wrong, and let your winners run!

Part 3: When should I cut my losses?

The flip side of this, is the “sunk cost” fallacy in investing. When you make a bad bet, you’re down in the market, and you realize this was objectively a bad investment and you want out… what do you do?

First let me caveat: this doesn’t mean “the price is down, so it’s a bad investment”. As we covered in many sections before, there are plenty of irrational or manipulative reasons for prices to be down, and if you believe in the project you should hold through it.

But, if you realize that you missed something and made a bad bet, or something in the world changed or was created that makes your investment thesis no longer valid (i.e. you owned Blackberry stock, and then the iPhone was invented. Or, the most important leader of a project left, and you no longer believe in the project), you should look to exit that investment as soon as you safely can. Don’t hold onto a losing bet because you don’t want to take a loss. Take your hit, learn the lesson, (take the savings from the tax loss!) and get that money working for you in a more productive way ASAP.

You WILL have losers from time to time, and it’s important to take these as moments to learn and move forward, not beat yourself up or hold onto a losing bet just hoping things will turn around. In the immortal words of one of the most successful investors in history:

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

- Warren Buffett

Part 4: Should I diversify?

Diversification is a vital concept, and you should always have some level of diversification. However, this term has become overused by so many in the financial industry that are hyper risk-averse and are just trying to sell you “diversified products”, that people have come to believe that diversification in and of itself is a good thing. This is complete nonsense, and can actually really hurt your returns. The best investors know how to effectively centralize their bets on their best ideas. If you’ll pardon me for using another Buffett quote here, I think he’s said it best:

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

- Warren Buffett

What that means, is when you really understand something, you should centralize your funds on your highest conviction bets. When you don’t understand something, you should diversify more. But, be careful that you aren’t diversifying funds into lower quality projects. In 2010 you could have “diversified” into everyone making cellphones, which would have included loaded up on Blackberry stock… Or, you could have just looked at an iPhone and said “yep, this is a million times better and is probably going to win”, and just bought Apple. Likewise, in the 2017 crypto bubble, you could have “diversified” into hundreds of different cryptos… 99% of them went to zero. Or, you could have centralized on the platform they were all built on (i.e. Ethereum) and be sitting on some incredible returns, even if you bought at the worst possible time in 2017.

Part 5: So when should I sell?

This is another tricky question, that is highly specific to your personal situation. First off, if you need the money, you shouldn’t be investing it in the first place. So, I’ll safely assume this is risk capital you don’t need to support your lifestyle for the foreseeable future.

If you’re sitting on a bunch of unrealized gains, and you think you might want some of that for any reason in the next few years, you might want to consider taking some profits. Crypto can of course crash and move into a prolonged bear market at virtually any time if the conditions are right. However, if you’re in this for the long term, selling, paying the ~20-40% tax on your gains, then hoping it crashes significantly to buy back in is a fairly bad plan. You could get lucky, but it’s not a great idea statistically.

If you remember from our earlier sections under Investing 101, we want to get out of the mindset of trying to accumulate “dollars”. We’re trying to accumulate assets, right? So, you want to get comfortable always owning something, and you should really only be selling something if you 1) no longer have confidence in the investment long term, 2) have a better investment idea, or 3) need the funds for something in your actual life (this includes holding extra cash for emergencies).

But, beyond that, you shouldn’t really be thinking about “cashing out” of quality investments… ever. You can sell portions as-needed to fund your actual life. But, your wealth comes from assets, not cash. You might sell one asset to buy another, but you’re never just holding all your money in cash, since that is a guaranteed way to lose money to devaluation & inflation.

Especially in a space like crypto, that legitimately has 20x, 50x, or even 100x upside in the next decade, be careful when you decide to sell a quality project! Think about the people who bought Apple at $5 and sold when it went to $10. They doubled their money! Yeah… and they also missed out on one of the most incredible growth stories in history. The people that sold Apple then were the people who couldn’t think past the short term fear or greed, to see what was really being built. It was a much better idea to hold on for the next decade, ride the multiple 50% and 80% price drops… and let the company grow and mature into the giant it is today.

This is the same thing with Bitcoin, Ethereum, or any other quality crypto. How many people sold Bitcoin at $1,000, or $5,000, or $10,000? What do you think it will be worth in 5 years? 10 years? In the long term, Bitcoin will either be a joke, or it will be worth $500k+. That is the reason you’re investing, not for some little 50% or 100% return. It’s the same situation with each of the crypto projects discussed on earlier pages, they will either be massively right, or massively wrong.

So, sit with the topics we’ve discussed here, be smart about how you take risks (don’t over leverage yourself!), plan for the lean times, and just sit back and let things unfold in their own time. 🧘🧘‍♀️