Portfolio Construction In A Bear Market

Diversification Is Key

So, I have tallied up my different stablecoin and cash holdings and am a lot higher than I expected to be, which is great! I am currently at approximately 40%, which is where I was when I made the initial shift in May of 2021. I have somehow managed to time the market fairly well this time around. Without Knowing, I made a few shifts literally days before the LUNA fiasco, which has helped a lot. What you need to remember is that the larger you are able to grow your portfolio, the more you are able to protect and hedge it. Let me explain. Someone with a $10K portfolio will look to have as much exposure to BTC and alts as possible. Someone else with a $100K portfolio can have the same level of exposure by only needing to risk 10%. The small portfolio holder battles to exercise good risk management based on what I have just stated. However, this is exactly why it’s so important. As your portfolio grows, you should be looking to decrease risk.

Cause & Effect

In a market crash, the smaller portfolio will be decimated, while the larger portfolio will barely experience any real loss. This is why I am always looking to slowly increase my stablecoin holdings. Building a portfolio that can skyrocket in a bull market and offset the loss in a bear market is all about diversification and appropriate holdings in stablecoins or cash. This is why I think it is a better idea to apply the 50/50 rule at this point. Bitcoin is not bullish and will not be until we settle above $40K. This means that even though there may be surges to the upside there is still a very real risk of dropping a lot lower. There are some calling for a bottom at $20K, $15K, and even $12K.

What is important to note at this point is that all three targets are actually within the realm of possibilities. There has been a lot said about the death of the four-year cycle but it still looks very much intact at this point. A typical bear market drawdown is approximately 80%, which would bring BTC down to the 13 800 level.

What If BTC Pumps From Here?

So, what happens to a well-hedged portfolio if the bullish scenario plays out? Quite simply, it pumps! If your holdings are perfectly balanced in that 50% is allocated to stablecoins or cash, then your portfolio will increase at half the speed of the market. A 30% rise would imply a 15% rise. If it does however decide to dump, a 30% drop would only imply a 15% drop. Appropriate portfolio construction is what removes the gambling aspect. Once a confirmed bull season is in play, investors can choose to disengage stablecoins and begin deploying. There is tremendous safety in this approach and you will notice that one particular element is kept very well in check.

Greed

That’s right, the culprit of pretty much every sad story. Keeping greed in check is in line with remaining unemotional. Emotions will get you rekt every time, which is why a well-planned portfolio and investment strategy are key because without them you have nothing but emotions. That being said, formulating a strategic approach as a reaction is not nearly as effective as a predetermined strategy that is already in place. Many will be learning a few hard lessons at this point but that’s how it goes. We’ve all had to pay our “school fees” at some point and even still experience hard knocks from time to time.

Final Thoughts

The best way to find out how well you have structured your portfolio is to ask yourself two very simple questions. What happens to my portfolio if the market pumps and what happens if it dumps? An honest answer will paint a very clear picture of how effective your risk management is. Experience will help you to make better decisions over time and simultaneously become more effective as an investor. These are merely my own thoughts and opinions and should not be considered investment advice. Wishing you well on your investment journey!

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