How To Lose All Your Money….Or At Least More Than You Should

Today was the most watched Fed Day in years…and that’s saying a lot since every Fed Day seems to be the most important ever. US rates tanked across the board while other markets mostly flew higher only to close lower.

In our model portfolio we gained a whopping 8 basis points. That is 0.08% for the day. It obviously would have been nice to have gotten everything right and make more but the flip side is that we REALLY don’t want to get everything wrong and lose a lot.

One of our goals over the years has been to get the portfolio to where no one event, at least not a normally scheduled event, poses much risk to us. If a nuke lands in a major city we could take a big hit. If an alien lands in DC who knows what would happen. But if the Fed has a scheduled meeting we should not be overly exposed to anything that has much of a chance of happening.

One way we are able to do this is by diversifying across asset classes. In fact one of the best things about macro trading is that you are kind of supposed to go across asset classed looking for great risk/reward situations. Being long and short across assets is one way to minimize event risk. Another way is to have trades on with different primary drivers such as growth, inflation, relative value, events, etc. Basically bet on a diverse set of risks across a diverse set of assets.

Why stop there however when you can then focus on price correlations, structuring your trades, sizing your trades, and the placing of stops?

All of this to say that if you want to eventually lose all of your money then make sure that you don’t do any of the above. Make sure that your entire portfolio is based on being completely right on one thing. To make it even more fun ensure that the one thing has a small chance of happening. Why bet it all on a Fed outcome when you can go all in, even levered, on a bet that the USD will collapse and our entire system will go back to the stone ages.

While some of that was said in jest….at least kind of, the reality is that many long term portfolios are setup to only do well in one economic condition and even more “trader” portfolios are betting on one or two outcomes on different events.  If you want to improve your risk adjusted, as well as your absolute, returns then pay attention to this stuff, think about it, study it, etc. and see what you can do to improve your risk and diversification processes.

Happy Trading,

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