Portfolio Size

We hear the question quite a bit: how big should my portfolio be to take advantage of the HPI techniques?

As always, the answer depends. Here is our approach assuming an options heavy portfolio.

To consider the portfolio to be diversified and sufficiently funded:

  1. Cash: Initially 50% of the portfolio; ranges from 20-50%.
  2. Index funds: 10% in an S&P Index fund like SPY; 5% in a Russell 2000 Index fund like IWM.
  3. Of the 11 sectors, be in at least 5, better to be in 7. For each, aim for an average of 5% of the portfolio. Through our strategic market review we'll establish actual target portfolio percentages that can range from 0-20%.

This totals 100% of the portfolio.

It is our experience that less than $10,000 per sector, in multiple positions and position types, is not effective.

So, the portfolio needs to be about $70k for the sectors, $20k in SPY, $10k in IWM and $100k in cash you get about $200k.

You may be successful with less. We've tried with a $100k portfolio. It did ok but could not beat the S&P benchmark. Our aspiration is 10alpha™, meaning 10% over the benchmark.

We have not looked at this in depth but the underlying issue causing smaller accounts to struggle appears to be underfunding. This results in the following:

  1. Single stock risk: With less capital available, fewer equities can be purchased. This hurts diversity of companies within a sector.
  2. ETF usage: Less capital results in more reliance on ETFs to achieve diversification goals. With an ETF you get the good with the bad and have a difficult time beating an average performance target (benchmark).
  3. Trade type: Underfunded accounts have difficulty establishing a diversity of trade types, e.g., volatility trades, long and short trades, etc.
  4. Options: Investors tend to shorten the time to expiration to keep the cost down. This raises the risk that the thesis will not pan out within a shorter timeframe.

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