Welcome to another Nugget of Wisdom! A weekly post I send out every Thursday. These are designed to be short and sweet, a quick read to (hopefully) impart some sort of wisdom, or at the very least to get you thinking about something interesting.
If someone waved a magic wand which liquidated your entire portfolio to cash (ignoring slippage, fees, tax, etc) — would you rebuy all your positions in exactly the same way?
This is the magic wand thought experiment, and it is something I think about regularly. The reason being that it forces you to think about and defend your existing positions.
Something that frequently happens in crypto is that you might allocate 2% of your portfolio to an alt or meme coin, only for it to perform extremely well and a few months later make up 15-25% of your overall portfolio.
That’s a great thing to happen! But would you conciously decide to invest 15-25% of your portfolio into any single alt or meme coin? Probably not. Therein lies the issue.
There’s some sort of mental fallacy that occurs where people seem to ignore the current valuation of their tokens and instead only think about their initial purchase price. “I only paid $500 for these tokens, so even though they’re worth $20k now, if they crash, I will only roundtrip and lose my initial $500”. Or something to that effect.
Total nonsense, but we all do it to some degree or other. And it’s true, it will probably hurt slightly less to roundtrip something with an initial cost of $500 vs putting in $20k and then watching that go to zero. But at the end of the day, it’s the same thing.
How often should you run this thought experiment? I would say at least once a month if you’re even semi-actively trading, but even when you’re not actively sitting down and thinking through this scenario, I think there’s merit in keeping it in the back of your mind at all times.
If you’re ever struggling to identify what positions you’d rebuy and with what size, there’s another exercise I recommend: ranking your holdings by conviction.
This is literally sitting down and manually writing down each token you hold. Once that’s done, go through them one by one and rank them by conviction level. I assign one of 5 categories:
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Maximum
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High
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Medium
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Low
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Moonbag
Doing this will help you in figuring out how and where you should be allocating. Goes without saying but you want to cut back on or completely eliminate the things in the low and medium categories, and stick to the things you have high conviction on. But sometimes it’s okay to have (small) positions in things you have less conviction in, if you think there’s a reasonable enough chance of the token pulling a 10x or something more.
Either way — I can’t imagine doing either of these exercises would be anything but helpful for your portfolio management. I do these regularly, and find it tremendously beneficial. Hopefully you do too.