Let’s see why a holistic approach is necessary when managing a portfolio. Your trading plan and trade psychology are very important as they drive everyday decisions. Even though it is natural to have exposure to a given name and be comfortable with it when trading, having too much exposure to the market with regards to the individual positions will harm you severely.
It is important to have tools that can help you understand how much money you may lose in case of a market sell off. Tradespoon always recommends having both Long and Short Options in your portfolio so that the exposure to the market can be minimized. In case of a market sell off, the Short Position will benefit thus decreasing your loss.
Another method by which you can minimize exposure is by looking at the Beta. Beta and Sharpe Ratio helps minimize exposure to the market by trading stocks that have low volatility and relatively low Beta, but provides high return on capital. The third method that can be used is Diversification.
We have different tools that help minimize the risk of your overall portfolio. Upon opening an account at Tradespoon, you can create a portfolio using the Portfolio Toolbox which will not only show you the Beta and Sharp Ratio for the overall portfolio, but also the other Greek Analytics such as the overall Delta and Theta.
You obviously do not want to place all your trades into once sector like Technology or Consumer Staples or Utility, because if the interest rate goes up the Utility sector will sell off, and an in-diversified portfolio will sustain unnecessary loses. This is why Diversification is crucial.
Depending upon experience, you should have 4-12 positions at any given time, unless of course you are an active day trader. You should also invest in different sectors that are not highly correlated to each other. Consider positions in Utility, Staples, Commodity-related, Technology, Financial, and Healthcare sectors. During a market correction, Utility and Staples outperform the SPY. So if you want to diversify your portfolio and thus minimize your loses during market sell off, consider having exposure to Utility and Staples that not only pay you a steady dividend but also look after your overall risk in case of a market sell-off.