Virtually any financial investment involves risks. As an investor, one of your goals is to make sure these risks are as low as possible if not null. If you can't control how individual positions of your portfolio evolve, you can decide how you build it in the first place.

Selecting the best positions available in a given market is always a sure thing to do. Selecting enough positions and diversifying your portfolio is the key step to insure your bankroll against big losses or worse--bankruptcy.

When considering speculations and investing in MTGO you should not be a stranger to these notions. Independently of the size of your bankroll, you should be ready to split it in dozens and dozens of specs, even if this implies buying only two copies of cards worth 0.5 Tix max.

Diversification of Your Portfolio

There are two basic ways to diversify your MTGO portfolio--increasing the number of positions and having different types of positions (Vintage, Modern, Standard, Boosters, etc.)

Not all types of speculation are created equal. To me, all fall into two categories--cyclical investments and speculations. Cyclical positions have fairly well known price trends and you know when and what to expect from these investments. Speculative positions hold much more uncertainty in their duration and in their returns; with more inherent risks, they can also explode rapidly.

Alongside an investment style your are comfortable with, you also want to find a healthy risk-reward balance for your portfolio. If you can't totally control the outcome of your specs, you always want to select the opportunities with the best potentials.

While I tend to rely mostly on cyclical investments for my own portfolio, I also make sure my portfolio contains numerous different positions. Increasing the number of positions in your portfolio to an (almost) risk free situation is the key factor under your control.

I said it before and I'll say it again, investing in a large number of different positions is not a guarantee of high returns but is certainly insurance again big losses or total bankruptcy. Zero risk doesn't exist but a 0.0001% risk of bankruptcy is within reach.

So how many slices should you have in the pie that is your portfolio?

Two Different Portfolios With The Same Rule

With the 1 Year 100 Tix Project I recently started I'm now running two very different sizes of bankroll. My main bankroll is several thousand Tix whereas my new venture is only 100 Tix.

With these two radically different ventures the content of each of these portfolios is different. My main bankroll consists mostly of Modern (cyclical) positions, a fair fraction of Standard positions (mostly M15), and a little bit of Legacy/Vintage speculations. My 100 Tix bankroll is, or rather will be, almost exclusively filled with cyclical positions. However I'm making sure that both of these bankrolls diversify enough in terms of the number of different positions.

I recently watched a YouTube video dealing with MTGO speculation and talking about general rules to follow for a good portfolio management. The video mentioned that any position should not represent more than 10% of your bankroll. This number seemed way too high to me.

We have often talked in the past here at QS about 5%. In order to reduce variance and risks, the value of any position (when bought) should not be greater than 5% of your bankroll. I agree with this number although after further reading and experiences I tend to say now that 3% or even 2% is a much more appropriate percentage, independently of the size of your bankroll.

The Big Bankroll

The average position of my main portfolio probably represents ~1% of my total bankroll, with smaller positions being as low as 0.2-0.4% and my biggest position being ~2%. This means that at any given time I have around 100 open positions.

To make up for this 1%, I try not to buy more than 50 copies of any cards, with 100 copies as a maximum. This makes me come back to my two last articles about the importance of time. This is especially true with big bankrolls. Cheap cards can make you "waste" your time (and money) as you need to accumulate a ton of them to make it significant enough for your bankroll. It can be easy and tempting to buy a 0.1 Tix card that is certain to increase by 1000% quickly, but I can assure you this spec, as good as it seems, is not worthwhile for a 10,000 Tix bankroll.

For the past several months, my aim has been to move to more expensive cards and invest at least 1% of my bankroll. However, with recent and more expensive acquisitions such as Liliana of the Veil I also make sure these positions doesn't represent more than 2% of my bankroll. Even if it means buying two or three copies of a card I stick to the rule.

The Small Bankroll

With a small bankroll it is certainly easy to fill up your portfolio with just a dozen or so different positions. For a 100 Tix bankroll even cards worth 0.5 or one Tix could completely exhaust your bankroll if you pull the trigger to easily. Respecting portfolio diversity is even more crucial, as I seek to grow my bankroll rapidly.

With the 100 Tix 1 Year project, I'm dealing with a bankroll far smaller than what I'm used to. Maybe you've seen one of my first purchase (@100T1Y on Twitter)--I only bought a single copy of Dismember. It's the complete opposite of buying playset after playset of a 5 Tix card, but what I want above all with this little bankroll is to avoid big losses and grow steadily and rapidly. I need to build a basket of positions large enough to avoid risks. Each of my positions with this 100 Tix bankroll should be around 2-4% of my bankroll.

By definition, such a rule for a very small bankroll implies that any card worth more than 3-4 Tix is "prohibited", making a lot of potential specs not suitable. The good news is a small bankroll can fully enjoy penny specs and their high percentage variance.

Tips From The Lending Club

I happened to hear about the Lending Club (lendingclub.com) via a tweet from QS author Sigmund Ausfresser. Without more details about the Lending Club, they provide an interesting way for individual people to "invest" into other individual people in need of money. Depending on who is asking and for what, there's a scale of risks and rewards. With this, and provided your profile as an investor is accepted, you manage your own investment portfolio and chose among the thousands of different opportunities the website offers.

What interests us here is that the Lending Club offers a bunch of advice on how to diversify your portfolio in order to reduce the risk of losses (when, rarely, people default on their payment) and in order to increase your chances of higher and steady returns.

Reduction of Volatility

Unlike our speculations on MTGO, the outcome of lending money to someone is pretty straightforward. On MTGO a losing position can mean anything from -2% to -90% (even at your worst I don't think you could lose more than 90% of the value of a spec). When people default on their payment you are likely to lose 100% of the cash you invested.

On the other side, a winning position on MTGO can reach crazy numbers as high as +1000%. With investments on the Lending Club your returns are known from the beginning and are usually between +7% and +15% according to the type of  investment you chose.

This means that if one of your investments is lost (-100%) you'll need a dozen of winners (+8-9%) to catch up. Thus, among the benefits of diversification is a great reduction of volatility in your returns.

In this graph, whereas the median of returns remains about equal, the difference between higher and lower (losses) returns is dramatically reduced with the increase number of Notes (number of different positions) in a single portfolio.

If statistically you know you're gonna have more winners than losers you simply don't want to put yourself in a situation where, by chance, a slightly higher number of losers than the average would put your portfolio in a general losing position. Increasing the sample size reduces the volatility effect--plain, simple and efficient.

Reduction of Risks of Negative Returns

Another effect of increasing the number of positions in your portfolio and making these positions as even as possible in their value is to considerably reduce the risk of global negative returns. As mentioned above, with relatively low and fixed returns, only a few losing positions (-100%) may negatively impact your bankroll.

The graph below shows that a portfolio of 100+ different positions of equivalent value pretty much nullify your chances of losing anything (less than 0.1%). You can also see that even the positions in your portfolio (no position represents more than 1% in this case) decrease the risk by a factor of 10x (1.3% to <0.1%), as compared to a similar portfolio containing positions representing more than 1% of it.

Creating a portfolio with numerous and similar value positions is clearly your best insurance against negative returns, either with loans to people or speculation on MTGO.

When looking for reviews from users of the Lending Club I found some people complaining about negative returns even after several months of using this service. When asked a little bit more about how they invested their money, you would not be surprised to hear that complainers all have a portfolio filled with only a few positions, one of which is defaulting and dragging down the whole portfolio.

This advice made total sense to me and applies perfectly to your MTGO portfolio and bankroll. Big or small bankrolls, if you don't manage and diversify them enough, your chances of success are greatly diminished. This is the part of the venture you can control--let's put all the chance on your side.

Thanks for reading,

Sylvain Lehoux