The Opportunity Portfolio

A simple way to contain risk while satisfying the urge to trade.

I think most of you are familiar with my investment strategy… Long-term, diversified, and ETF-based. Relatively simple.

Some might even have this preconceived notion that I think picking stocks isn’t worth it or that I’d look down upon someone trying their luck and skill at stock picking. In all honesty, I have no issue with people picking individual stocks.

Investing can be fun, and people can build up some serious conviction in some of their favorite companies. Who am I to deprive them or steer them clear of that?

Enter the opportunity portfolio.

The opportunity portfolio is what we label most portfolios that deviate from the standard portfolio. This could be a portfolio that is actively traded, options (usually not recommended), individual companies, or even cryptocurrency.

But here’s the catch. The opportunity portfolio is not one-size-fits-all. Usually, there are strict individual parameters around the opportunity portfolio, and we generally try to avoid them until lots of the fundamentals are taken care of.

If someone is:

• Contributing to a 401(k)

• Contributing to a Roth IRA

• Tracking well for retirement

• Building their “boring” asset base

They might just be a candidate for an opportunity portfolio! The opportunity portfolio is usually scratching an itch. People love to find conviction in stocks or even give some speculative trading a try.

Once an opportunity portfolio is brought up, we like to define the parameters. The most important parameter revolves around concentration. While it is always subjective, a general rule of thumb would be no more than 5% of investable assets.

At 5%, even if the account were blown to $0, we want to have a general feeling that this wouldn’t derail someone’s financial well-being. Remember, this will differ significantly between different situations.

So, as an example, if a younger professional with $200,000 in investable assets wanted to give stock picking a try with $10,000, that would likely not build too much risk into their financial life, yet it may allow them to scratch the itch of buying individual stocks.

Now, this is subjective. For someone with $10,000, would I consider a $500 trading account? Ehh, probably best to stick with the fundamentals at that point.

As investable asset bases grow, some are afforded the opportunity to add a bit of risk. The account is then monitored and can be tailored accordingly.

At the end of the day, it’s not uncommon to see people interested in alternative assets, trading, or picking some individual stocks. Rather than depriving someone of that, we like to outline the risks, contain the risks, and allow them to have the experience.

As with almost everything in personal finance, it is all about balance. Stock picking sounds pretty cool, but concentrating one’s retirement in just a few companies can increase their risk exposure significantly.

Encouraging people to learn more about investing while managing the risks associated can allow them to scratch that trading itch, learn, and further identify with their investments.

That’s something I’d never want someone to shy away from… as long as the risks are contained and properly managed.

While the initiative to pick individual stocks may seem like it’s about alpha, the opportunity portfolio is much more about behavioral containment.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.