Limited-Risk Investing In A Smaller Account

The performance of our $30k portfolio from June 4th, net of hedging and trading costs. 

Risk-Limited Investing With A <$50k Account

One of our newer subscribers brought up a good point about our top names: their share prices often make it hard for smaller accounts to buy and hedge them. Here we offer a few different approaches for investors with smaller accounts. Let's start by looking at our top names from June 4th (our system estimates returns six months out, so this is the most recent cohort to hit six months). 

Our Top Names From June 4th

In a previous article (Why-Yo Silver?), we detailed how we select our top names. These were our top ten names on June 4th of 2020: Netflix (NFLX), Nvidia (NVDA), Shopify (SHOP), the iShares 10-20 Year Treasury Bond ETF (TLH), Okta (OKTA), Atlassian (TEAM), ProShares Ultra Gold (UGL), Tesla (TSLA), Chipotle (CMG), and Twilio (TWLO). 

You can see our subscriber's point: the average share price of this cohort was $418. Chipotle had a share price of over a thousand dollars, meaning 100 shares would have cost more than $100,000. Let's consider a few different approaches a small investor could have taken here. 

First Approach: Buy Fewer Than 100 Shares

The simplest approach there would have been to divide your $50,000 by ten and invest $5,000 in each of those top ten names. Had you done that in this case, you would have been up 52% over six months. 

However, you would have taken on considerable risk. 

Second Approach: Same As Above, Plus Optimal Puts

What if you bought equal dollar amounts of each of these shares, and bought optimal, or least-expensive puts on them to limit your downside risk? This wouldn't have worked. The problem is that one put option contract covers 100 shares, so it would have been way too expensive to hedge odd lots (numbers of shares fewer than 100) this way. For example, let's say you had wanted to protect against a greater-than-20% decline on June 4th. The cost of doing so with 100 shares of Chipotle on June 4th was about $4,700. You can see the problem here: the cost of one options contract, $4,700, would have eaten up nearly all of the $5,000 you had to allocate to Chipotle shares. 

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