Many novice and not-so-novice traders fall into the trap of following the old scheme of "buying when the market falls and selling when it rises." Perhaps at some point it worked because it is relatively easy to apply by the mass of the market; however, this does not represent the return that could be expected to live off trading.
Furthermore, although it sounds logical, this simplistic strategy can lead to significant losses in the long run. Why? Because it does not consider key factors such as the risk and expected return of the assets. Choosing assets randomly or relying solely on emotions can be a direct path to failure.
On the other hand, there is a proven method that can help you build a solid and profitable portfolio: Mean-Variance Optimization (MVO). This approach, developed by Harry Markowitz, uses key metrics to select assets that maximize expected returns while minimizing risk. Do you want to know how it works?
Let’s quickly review:
What is the MVO method?
It is a widely used technique to maximize the expected return of a portfolio given a level of risk or, alternatively, to minimize risk for a given expected return.
In less technical terms, the goal of the technique is to seek optimal performance in a portfolio based on certain metrics and not on the simplistic method of buying low and selling high:
Expected return (mean): Calculate the historical average return of each underlying asset. This can be done by analyzing the historical prices of the asset.
Risk (variance or standard deviation): Measure the volatility of the historical returns of the asset. The higher the volatility, the greater the risk.
Covariance between assets: Evaluate how asset returns move in relation to each other. This is crucial for determining portfolio diversification.
Additionally, this method considers the correlation between assets, meaning it seeks to combine assets that do not move in the same way. This reduces the overall risk of the portfolio.
How to build a diversified portfolio with stocks and cryptocurrencies:
Select your assets: Choose a combination of stocks and cryptocurrencies that interest you. For example:
Stocks: Apple (AAPL), Microsoft (MSFT), Tesla (TSLA), Amazon (AMZN), Coca-Cola (KO).
Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Solana (SOL), Cardano (ADA).
Collect historical data: Obtain the historical prices of these assets (you can use platforms like Yahoo Finance for stocks and CoinMarketCap for cryptocurrencies).
Calculate key metrics:
Average return: Calculate the average daily or monthly return of each asset.
Risk (standard deviation): Measure the volatility of returns.
Correlation: Evaluate how asset movements relate to each other.
Optimize your portfolio: Use tools like Excel (with Solver) or Python to calculate the optimal combination of assets that maximizes expected return for an acceptable level of risk.
Evaluate and adjust: Review your portfolio periodically and adjust the weights according to changes in the market.
As a practical example: 10 assets placed based on the previous metrics.
Suppose you select the following assets for your portfolio:
Stocks:
Apple (AAPL)
Microsoft (MSFT)
Tesla (TSLA)
Amazon (AMZN)
Coca-Cola (KO)
Cryptocurrencies: 6. #bitcoin (BTC) 7. #Ethereum (ETH) 8. Binance Coin (BNB) 9. Solana (SOL) 10. Cardano (ADA)
When applying the MVO method, you might discover that a balanced portfolio allocates 60% to stocks and 40% to cryptocurrencies, with specific weights for each asset according to their performance and risk. For example:
Apple: 20%
Microsoft: 15%
Tesla: 10%
Amazon: 10%
Coca-Cola: 5%
Bitcoin: 15%
Ethereum: 10%
Binance Coin: 5%
Solana: 5%
Cardano: 5%
This diversification reduces the impact of cryptocurrency volatility and takes advantage of stock stability.
Why is this method better than buying and selling based on emotions?
In every book and video, you always hear that you must learn to control your emotions, work on your mindset, but they omit a great truth: IT'S NOT ENOUGH. You are competing with the best in the market in a zero-sum game.
This change of perspective was made clear to me by a trader with a simple phrase: psychotrading comes after understanding what you are doing in the market.
It's not that you need to study every trading book, but to study the right books, learn what really works, and discard what doesn't. However, for this, you have to move away from even old conceptions about trading that it's easy money, that it's going to make you a millionaire without effort, that by giving it every day, you'll pay off someday. This will only ruin you and likely take you out of the game.
Over time and with the right study (which I still do) and many blows to my ego, through brutal honesty on their part, and discovering that I had been digging my own hole for years, I realized why they asserted what they asserted.
When you buy or sell any type of asset not for the adage of selling high and buying low, and you find the techniques or methods that use data to help you make decisions, you no longer focus your "investments" or your buying and selling on what others do, on your opinions or guesses, but on what, according to a series of metrics or data, the market is expected to do, and you act accordingly, based on mathematics and probability.
So, although it sounds difficult (which it is, like any career), when you are on the right path, all you have to do is move forward with the peace of mind that you are doing it right.
Therefore, keep in mind, before entering a trade, the following pillars, and let this be just the beginning to make trading your profession and not a simple roulette game:
Data, not emotions: The MVO is based on objective metrics, not on market impulses or rumors.
Volatility: Combine assets with different levels of risk, according to their volatility.
Long-term performance: Rather than chasing quick profits, this method helps you build wealth sustainably.
This should also be applied to trading when you decide to adjust your position size, your level of profit and risk to start seeing your real progress, based on data and not because TODAY YOU FEEL LUCKY AND WANT TO RISK IT ALL.
In conclusion:
This is just the beginning; we improve not by the successes we start to have but by the quality of questions we ask ourselves while we fail and how efficiently we can learn to solve our trading mistakes.
Putting aside the old scheme of "buying when it falls and selling when it rises" is a first step to leveling up.
Using a data-driven approach, such as Mean-Variance Optimization, will allow you to make decisions based on metrics and not on hunches, impulses, or events like crypto launches, FOMO, and other market situations that we simply cannot control but can learn to manage.
As trader Mariel Lang said: "What really matters is not avoiding drawdowns, but ensuring that you can always stay in the game. Survive."
See you in the market 💰
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