Do you have a portfolio? Or do you only think you do?


Are those stocks and/or crypto you own really a portfolio?

It’s time we really define what a portfolio is. Or, at least what it should be.

A collection of assets ≠ a portfolio

According to the internet (in this case, Investopedia), a portfolio is “a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).”

Can that really be it? Shouldn’t there be … more? If all a portfolio is is a collection of assets, then any random collection of assets could qualify, no matter how illogical or arbitrary or unconstructed.

A portfolio is more intentional than that. It’s about knowing how your assets work together — not just individually — to produce your overall returns. A portfolio is always the sum of the parts, not a compilation of a bunch of parts randomly dispersed.

When all you have is a collection of positions, you don’t know how all the pieces fit together. That tends to reduce return potential and increase risk in aggregate.

But when you’re intentionally looking for what pieces fit together, and in what way, to produce the best possible aggregate, then you have what we’d call a true portfolio.

Alright, you’ve got a portfolio. What next?

If we can agree that a portfolio is more intentional than just a collection of positions, the next step is understanding what makes a strong portfolio vs. a weak one.

This is where the math comes in.

You’ve got to have some way to quantify the risk and reward of your portfolio, the same way you’d (hopefully) do with each individual asset.

But want to know a secret?

You can really just think of your portfolio as an asset unto itself. As in, when you combine a bunch of assets together, you’re really just creating a bigger asset, the same way that ETFs or indexes are an ‘asset.’

If a portfolio is an asset, then you can analyze it the same way. It’s got a lot of the same qualities: its value goes up or down day by day, moment by moment. It’s got a certain level of risk attached to it.

Here’s the problem most people run into: there hasn’t been a great way to analyze your positions at the “portfolio” level.

This means that you couldn’t look at the performance of Assets A, B, and C and truly understand what impact their relation to each other would have on the ‘new asset’ (i.e., the portfolio).

If you put them all in a portfolio at equal weight, for example, to what degree would the resulting ‘asset’ be volatile, be at risk for large drawdowns, or expect to return a certain amount?

Unless you’ve got all of the portfolio-level statistics you can pull up and play with, it’s very hard to do this.

Without that direction, you could easily create a bad portfolio. Which is to say, a portfolio that is not optimized for risk/reward and may be completely opposite of something you’d actually invest in. Perhaps way too risky or not having a high probability to yield nearly enough returns.

When you can measure how all of the assets behave in aggregate (at the portfolio level), and you pick the assets intentionally to engineer a broader mass of assets, then you have a portfolio you can rely on.