After popular request in the Members Survey (ok 4 guys) I am bringing back an occasional Portfolio Clinic article. 

This is something I used to do on Twitter back in the day. I look at some portfolios where the holder would like better results and see what I can suggest to fix ’em up.

Underperformance can have many reasons from poor player selection to chasing too much hype. But you can also buy good players but structure a portfolio incorrrectly, or fail to move swiftly enough to account for changes in trends.

I was planning to cover 2-3 but I found a portfolio that gave me a lot to say, so this time I’ll focus on…

The 777 Player Portfolio

I am used to seeing 100+ player portfolios. I’ve even seen a few 300+ player ones. 

777 players almost had me spitting out my tea!

I’ve just shown a couple of snippets, because I can’t share the whole portfolio it’s too big.

There are some good selections in this portfolio, bought at a good time. Particularly some of the larger holds show good judgement. 

But. It’s simply too full of average or worse selections to ever be able to make anything like optimal progress.

This is not because the trader is bad at selecting players – he is not – it’s because there are not 777 high quality selections on FI at any one time. 

On any given day, I doubt I could find more than 40-50 that I would consider to be great selections at that moment. But that is more than sufficient for great progress. 

Optimal progress would probably mean being so good that we can pick 10 players who go on to be amongst the best picks of the season and having 10% of our cash in each.

It’s possible, but at 10% portfolio value in each player, it’s too aggressive for most. I did an aggressive portfolio for my 18/19 New Trader Challenge from £1k to £3,200 but I was trying to prove a specific point about what can be achieved with smaller budgets (and maybe I was also being a show off). Most of the time I run with 30-40 players these days.

Having just 10 players puts way too much pressure on us to be perfect – we actually don’t have to be. Getting 70-80% of our selections right is enough provided we cut off trades that are likely to go bad and don’t take too many of the foreseeable losses I talk about often. 

I understand the importance of managing risk. In fact most of my professional life has been specifically in risk management. But a portfolio of 100+ players has all kinds of passive risks and is far from safe.

For starters, we would be missing out on gains. Missing out on gains is no different in the end to taking a loss, apart from that we might feel slightly better about it psychologically because we probably never knew it happened.

And, we are making it impossible to adequately track the progress of our players because there are just too many of them. 

The trading saying to know what you own and why you own it is a classic for a reason. We’ve got to keep in touch with what our players are doing or we will fail to react to the key events that will move their prices up and down.

With over 100+ players there is no way you can really do that, maybe if you were full time on it but even then it’s a struggle.

777 is an extreme example. But I’d be saying the exact same stuff about any 100+ player portfolio.

Portfolio Balance

For anyone who has read my guides, you’ll know that I typically advocate somewhere between 20-60 players as the optimal range, depending on how aggressive you want to be. 

I’d say 30-50 should work for most people provided they are making good, evidence based decisions on player selection and strategy and are checking in to FI at least a few times a week.

The more attention you are paying, the better information you have, and the better your judgements are, the less you need an extremely wide selection of players.

A less kind way of putting this is that extremely wide diversification is for traders who aren’t paying attention or don’t know what they are doing. That sounds harsh to type, but I don’t think it is wrong. 

Let’s look at the reasons given by the holder for having such a wide selection: 

Diversification – to lower risk, and gives less worry about individuals dropping due to injury or poor form or a trend shift. Mistakes aren’t punished as heavily. No player accounts for more than 2% of the portfolio.

Dividends – he wins dividends most days which is enjoyable.

The holder reported gains of 57% in 12 months, comparing it to an ISA which returned 0.75%! 

In those terms, he isn’t wrong! But, the market overall gained just over 149% since this time last year to the start of Feb 2020, and has risen even more since (I only have the figure up to Feb to hand, it illustrates the point!). 

This is the yardstick I measure success against – obviously we are trashing the ISA but are we beating the market? 

If we aren’t that creates three clear problems:

1) We’re losing out on money now. Money lost in potential gains is not really any different from money lost through dropping players. It’s a risk like any other – you just don’t see these losses as clearly.

2) When FI becomes tougher and everyone is not being carried upwards automatically by the rise, and it will, it will be the traders who are beating the market who keep making progress. Those lagging behind the market will get chewed up and make a loss. 

3) The gains we are making can trick us into thinking we are better than we are which stores up problems for later. We leave sloppy habits in our trading game which hurt us now and will hurt us more later.

At 57% all of our decisions are resulting in a significantly worse performance than buying a market tracker. And a market tracker takes us near zero time to maintain. We’re using up our time, but that time spent selecting players is actually reducing our gains vs just buying a tracker. Time is a resource to me as much as cash is.

If we carry on with this approach – we will almost certainly lose money if the FI market ever goes through a more stable period where gains are not automatic. It is very likely that will happen at some stage.

For that reason, if someone told me they wanted to invest but didn’t want to put in any time to research or manage the portfolio I’d just recommend buying the tracker and some reliable long term picks to back them up.

(Note: We should not confuse reliable and long term with young as many do. This is far from the truth – many of these hyped young players will be warming the bench in the Championship in 2 years time. The most reliable age is actually 22-25 in my view. Old enough to be established, young enough not to lose value for fear of retirement). 

But we can do so much better than the tracker without having to give up our day jobs. And members (I hope) have an advantage in having me to take a lot of the heavy lifting out of scouting and market analysis.

Better Ways to Manage Risk

One of the first things I’d recommend is to decide on an appropriate % of the cash we will assign to each player, and actively manage it. 

For example, if working with a £1,000 portfolio:

Aggressive: £50 standard buy, £100 big buy, Approx 10-15 players.

Balanced: £25 standard buy, £50 Big Buy, Approx, 20-30 players

Passive: £12.50 standard Buy, £25 Big Buy, Approx, 40-60 players

What is best really depends on the individual and how much risk they are happy with.

For example, if I’m trading with £10,000 and I happen to be rich and losing that will be annoying but in no way devastating to my life, I might lean towards aggressive and go for 15-20 players. 

If that £10,000 is critical to me, and the thought of losing it fills me with absolute dread – I shouldn’t have it in FI and I should be trading with an amount I am comfortable with or not at all.

But if I am happy to play with £10,000 but it makes me nervous I’d lean towards more passive at 50-60 players.

There is no “wrong” number here and you can acheive great results with 20 players or 60.

I would never recommend going much beyond 60, though. Certainly not beyond 75+. If we aren’t confident with fewer than 75 players it may actually be more beneficial to buy a tracker and just take the stress out of it.

This doesn’t mean we are not managing risk. Far from it.

We’d be managing risk through diligent player research and market analysis. By joining this site and reading the content, members are actively managing risk by securing access to good information (going on the members survey results, anyway!).

Not to mention the additional research people will be doing on top.

It’s only where people aren’t doing diligent research on players and the market, and aren’t putting in a reasonable amount of effort into monitoring their portfolios where they will need extreme diversification.

But it’s important to know that managing a 30-60 player portfolio effectively is not a full time job.

Provided your selections are solid and you have a good strategy fit (with help from Key Strategy hopefully) and you have quality (with help from Scouting) many players are going to stay good holds for months or longer, and it will generally require tweaks each week rather than trades every day.

For interest, I probably trade on average no more than 4-8 times a week.

Key Recommendations

With all this in mind, for this 777 player behemoth portfolio I would obviously recommend a serious cull to chop off the fat and get this down to a manageable 60 players that are our best selections for both the trends ahead and in terms of performance strength.

That’s serious surgery, with over 700 players on the chopping block. But this is a seriously big portfolio. It’s a lot to do but I would be extremely confident that this would lead to much improved results over the months ahead.

Most of the time, over large portfolios are in the 100-150 range and that’s not too bad. I’d still recommend the same for portfolios of that size – come down more towards 60 players.

The only time I wouldn’t is where the trader says they lack confidence or time to check in on their portfolios at least a few times a week. 

In that case, a significant buy of the tracker 100 supplemented by some well chosen longer term picks might be the way to go. If you need low maintenance – be low maintenance.

A bit like losing weight in real life, the best way to slim down a portfolio is to do it gradually over weeks and months. Drastic firesales can be very costly, especially with spreads being bigger than ever these days.

Trying to move what you can to market over weeks is the best bet. With small numbers of shares in players, this might be fairly straight forward and you don’t have enough shares to visibly impact the market anyway.

If you are trying to dump a large holding of an individual player, it is best to do it gradually and list the shares a few hundred at a time – the last thing you want to do is send the price of the player down by making a large listing before you have actually sold up.

There will be some that just aren’t going to move to market anytime soon, and may languish in the sell queue for a long time. This is where the use of Instant Sell can be a good move so that you can move that money somewhere more useful. But I generally avoid Instant Sell if I can help it, it is getting more and more expensive to use and I think FI will continue raising spreads particularly as Order Books are introduced.

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