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How to Survive Volatile Markets

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Asset allocation is your wealth plan for how much of each type of asset to hold. Common assets include stocks, bonds, cryptocurrencies, real estate, fine art, precious metals, etc. A portfolio of 100% stocks or 100% crypto is taking on a lot of systematic risk since your eggs are in one basket. For some this is fine since they watch the basket closely and potential use other strategies to manage risk. For most if you want to sleep at night it is nice to have many asset classes where some will zig while others zag. This allows investors the ability to sleep soundly knowing they are not risky everything on one idea.

The 2020 stock market crash is a great example. While stocks, bonds, real estate and other asset classes were tanking with the expectation of a global depression, gold held up very well and within a few weeks was back to positive performance YTD. Gold did not go back 40% plus like the Nasdaq where investors had to hope for a miracle to recover many years of lost gains (obviously the FED miracle worked so far and those investors that were able to emotional hold on for the ride came out ok).

A superior approach would have say 70% stocks, 5 to 10% cash, 10 to 15% precious metals, 5% crypto, etc. This investors have cash to buy bargain stocks, precious metals for uncorrelated returns and crypto for moonshot gains. If you designed your asset allocation right you should not worry about any given asset declining since you have a diverse portfolio and a clear plan of action.

Should you have 1% in Apple or 10% in Bitcoin? If you are right the more you invest in that asset the better off you will be. However life tends to kick people who take on too much risk expecting everything to work out favorably.

I for one like to keep each individual stock purchase to 5% of net worth. This is my target but I like to use market fluctuates to establish the full position. For instance in stead of going all in on the 5% I may seek to start with 1.25% position and then add additional purchases as the stock price declines or achieves various breakout characteristics.

Not only does the initial limit of 5% protect you from a disastrous situation but you let also let the investment prove itself to you before you commit additional dollars.

If you only want to risk 1% of your capital on each trade you can use an appropriate stop loss given your desired position sizing. If you have a 5% position size then a stop loss of 20% will risk 1% of your capital. Or for assets like bitcoin if you bought 1% position size then you do not need a stop loss since you are comfortable losing the full 1%.


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