Education

Lesson 4: Investment Portfolios

In the previous lesson we learned about portfolios and how to use them to reduce risk and stabilize profit. In this lesson we will have a closer look at portfolios and talk about different portfolio strategies.

Your goal in this lesson will be to learn how portfolios are created and decide which strategies work best for you. Remember that no strategy is one-size-fits-all and only you can decide which combination works best. As this is an educational group, please feel free to share your portfolio ideas and questions in the comments.

Now, let's have a look at a few portfolio examples.

Example #1 - Equally Distributed Capital

Let’s start with the simplest kind of portfolio. Here, capital is distributed equally among several cryptomarkets. Let’s say your capital is 10,000 USD, and that this represents 100% of your investment capital.

One way to invest would be to assign equal amounts of money to specific coin groups as follows:

• Bitcoin - 25%
• Altcoins - 25%
• Shitcoins - 25% *Shitcoins are basically an Altcoins that lose value over time, whether it be because of poor planning or simply because they stem from scams.
• Reserve - 25%

Or you could choose to distribute your capital among several markets:

• Bitcoin - 10%
• Ethereum - 10%
• Litecoin - 10%
• Dash - 10%
• Zcash - 10%
• Ripple - 10%
• Ethereum Classic - 10%
• Monero - 10%
• Neo - 10%
• Reserve - 10%

This strategy is simple and can be used by novice traders. The number of markets or groups in each portfolio depends on you.

A more diverse portfolio carries less risk, but is more difficult to monitor. In this sense, balance is key: invest in several markets but keep in mind your monitoring capacity. By investing in several markets, you’ll be more likely to identify new trading opportunities and increase your profit.

Example #2 - One strong market and a minor investment in other markets

Another strategy would be to invest most of your capital in the strongest market and distribute the rest among several smaller markets. Here, the stronger market would be your main source of profit, whereas the smaller markets would allow you to diversify risk and increase marginal profit.

To illustrate, let’s see the following example. Here, Bitcoin is considered the strongest coin - which makes sense, since Bitcoins are currently the king of cryptocoins. As our main market, we’ve decided to invest 50% of our capital in it. The rest of the capital will shared between our reserve and other markets such as Altcoins.

Again, let’s say that your capital is 10,000 USD and that this represents 100% of your investment capital.

An example of this kind of portfolio would be:

• Bitcoin - 50%
• Altcoins - 30%
• Reserve - 20%

Or it could be:

• Bitcoin - 60%
• Altcoins - 20%
• Reserve - 20%

This kind of portfolio allows you to focus on your market of choice while using other markets to increase income and diversify risk.

Bitcoin is currently one of the best (if not the best) market to invest in. It is trusted by the crypto-community and is currently treated as an official financial instrument in commercial markets.

Investing in Altcoins could give you a larger profit-per-movement ratio, but results will be more volatile.

By investing in small, usually less-profitable markets you can protect yourself from higher risks and still have a chance at making a good amount of additional profit. If you use Shitcoins instead of Altcoins, this kind of portfolio will look much more attractive.

Here is an example of this kind of portfolio can look like:

• Bitcoin - 60%
• Shitcoins - 20%
• Reserve - 20%

Or alternatively:

• Bitcoin - 50%
• Altcoin - 20%
• Shit coins - 10%
• Reserve - 20%

Don’t forget that the size of your reserve can vary. It all depends on your trading style: do you prefer a more aggressive approach or are you more satisfied with conservative strategies? The answer to this question will help you decide.

Example #3 - Mixed Markets

Another option is to build a mixed portfolio based on different markets. Let’s say you invested in cryptomarkets, but you’d also like to invest in ICO projects.

Your total capital is 10,000 USD - equivalent to 100% of your investment capital. A simple example would be the following:

• Crypto markets - 50%
• ICO - 30%
• Reserve - 20%

The proportion of each investment may vary, but the goal remains the same: to diversify risk and increase profit by investing in different kinds of markets - cripto or not.

This kind of portfolio feels more stable because it combines markets that are not related and don’t interact directly.

For example, if cryptomarkets start falling in a bearish cycle, ICO investments won’t be affected and may still provide good profit.

Example #4 - based on trading strategies

This type of portfolio consists of distributing capital among different trading strategies.

A trading strategy is a set of rules one follows when searching for trading opportunities.

Let’s say your capital is 10,000 USD (=100%). An example of a strategy-based portfolio would be as follows:

• Trading Strategy #1 - 30%
• Trading Strategy #2 - 20%
• Trading Strategy #3 - 20%
• Reserve - 30%

Here is an example of a portfolio based on time-frame strategies :

• Long term trading - 30%
• Middle term trading - 20%
• Short term trading - 30%
• Reserve - 20%

Once again, percentages will vary from portfolio to portfolio.

Just remember that using different strategies will allow you to diversify your trading opportunities. Using different time-based strategies will enable you to reduce risk.

Example #5 - Based on Different Signal Providers

Another option is to distribute your money based on signal sources. This kind of portfolio is useful when using different signal providers. The size of your portfolio and the providers on your list will depend on your personal taste.

Once again, here is an example of a 10,000 USD portfolio, which represents 100% of your investment capital:

• Signal Provider #1 - 25%
• Signal Provider #2 - 25%
• Signal Provider #3 - 25%
• Reserve - 25%

This is yet another way to reduce risk and improve trading opportunities. Novice traders are welcome to use it.

Let’s recap

The examples provided above illustrate basic portfolio strategies. In real life, portfolios are not always so puristic. Seasoned investors will often combine several portfolio strategies to create investments that are well rounded and diverse. But one has to start somewhere 

The sky's the limit and you’re in charge of deciding which combination is right for you.

In our next lesson, we will talk about how to analyse markets to identify trading opportunities and create profit. This is a key source of money-making in the cryptomarkets and it is based on a topic called technical and fundamental analysis.

Are you ready to become a technical analyst?

Until next time …