When traders first start out, and particularly when they first learn of the principle of diversification, there is a temptation to buy in to a number of different positions, often spread across different markets and of varying time-frames and degrees of complexity. These same traders quickly find that they’ve bitten off more than they can chew, in terms of too many (or too capitally intensive) positions that are practically unmanageable. The management burden of trading shares should not be underestimated, and traders are recommended to choose manageable diversification, so they can still realistically oversee their trading performance and make appropriately detailed decisions where necessary.
Striking the balance between diversity and practicality is no easy task. On the one hand, the temptation to spread risk as thinly as possible is natural to an extent, with traders wanting to make sure they isolate each portion of their capital from the other’s liability. While there is nothing wrong with diversification of this sort, and in fact it is encouraged as part of successful risk management, straying too far into unmanageable territory can put unnecessary pressures on capital and make for weaker trading decision-making across the board.
The research and input that needs to go in to every position you trade means you cannot keep up too fast a rate of transacting (unless your strategy lends itself to ultra-short term dealing.) Taking time over positions is essential in getting to truly understand them and the markets you’re dealing in, and this burden doesn’t shift as soon as you’ve executed the trade – you need to manage your positions and keep an eye on what’s happening as you go. While stops can carry some of the burden at the extremes, each position still needs ongoing trader attention, and the more numerous and diverse the positions you have on offer, the more likely you are to be trading too heavily for your resources.
Trading a Wide Portfolio
Trading a wide portfolio also raises the question of whether you are trading too much of your capital at one time. Capital should be invested, but it should also be rationed to an extent such that your total outstanding liabilities can all be accounted for and don’t inflict too much capital damage in the unlikely event that they are all runaway failures. Protecting your capital is a guiding principle for successful investing (as opposed to hoarding capital, which is counterproductive), so it’s important to make sure you are not subjecting too much of your pot to any one transaction, or at any one time.
Trading a Manageable Portfolio
Trading a manageable portfolio is strongly suggested for traders looking to build their investments. While diversity is extremely valuable in spreading risk, it’s important to remain sensible about the capital and effort burden that each new, different position generates, and to trade within your means as far as shaping your portfolio is concerned.