It hurt me to sell that position....a line that I heard from a friend the other day as he exited a trade in which he was up +32% over roughly two months. He said to me, "It was the crown jewel of my portfolio" and I thought it was funny. You see, I told him that the price chart was saying there were headwinds (resistance in trader terms) ahead. Which meant that short-term, he would have to sit through a draw down to which we always hear "I don't mind holding it for a while", yea, you really do, you're just changing the narrative.
Most of us are not conditioned to take profits but we're certainly conditioned to buy a stock and let it lose value and hold it. Amazing isn't it? What I want to talk about today is this concept called 3 Tier Investing. In fact, we discuss this a bit in our Beginners of Investing Webcast which you should attend if you've yet to do so already.
| 3 Tier Investing Method: The 3 Tier Investing Method is something we coined as a term a while back as we saw students using the same core principles of knowing how and when to buy and sell an asset but using different trade structures and hold times to do so. Tier One: Retirement/Long Term Account Typically we look for stocks that we can short or buy for a 6+ month period using shares of an asset. Tier Two: Income Account We trade futures (E-Mini/Oil/Gold/Dow etc) and Options for short-term, income style trades. These last anywhere from minutes to 5 days. Tier Three: Speculative Account Purely growth with options or riskier stocks. This is more aggressive, requires less capital and is designed to trade large price move events. |  |
So how does this fall into the story about my friend above? Well you see his portfolio was concentrated on Tier One only. He owned shares of a company and was expecting to ride it forever (in fact, he didn't even know where to sell it). 90% of his cash was in that one stock with 10% sitting in cash in his brokerage account and none working on Tier 2 or Tier 3 strategies.
This matters when you want to learn about growing your money. The best hedge funds in the world do this all the time, or something very similar rather. So this, in our opinion, is how to develop a well rounded and self-managed portfolio.
Not everyone will use all three tiers for investing as everyone's needs and income goals are different, however, it's something that everyone should at least consider.
If you want to learn more you can start by attending one of our free weekly webcasts or scheduling a meeting with one of our education counselors who can walk you through different programs based on your needs.
Dan Bustamante
Instructor
CFOT
