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Maintaining a Position Mindset in a Portfolio

I met with the head of a PhD program yesterday. We had a good discussion of markets and trading, and he brought up a subject that I thought was working a blog post.

This professor talked about how a trader or investor’s mindset can change when going from dealing with individual trades to managing a portfolio of positions. Specifically, he observed how someone who would be very diligent about risk management and following a specific plan of action when managing one specific position could let all that slide when managing one position among many.

For example, a trader whose only position is a long in XYZ stock could be very good about exiting that position on a stop if the market goes against him. If, however, XYZ is only one of ten holdings in a portfolio, the trader might do more rationalizing of letting the position run if the rest of the portfolio is doing well. And you could flip that around to a poorly performing portfolio by dumping positions before they should be sold.

Yes, there are at least some academics who allow for psychological influences on trading decision-making. 🙂

Of course the point is that unless you specifically have a combination of trades that are meant to work together (hedges, pair trades, etc.) then each individual position should be managed based on its own merits.

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