Risk Positioning
An elbow in a graph curve is where the curve suddenly and sustainably changes direction. After years of ignoring the topic, we found our first real “elbow moment” in investing when we applied risk positioning. We believe that any trader or investor that adopts it will too experience an elbow moment.
Before we describe risk positioning, let’s first define some terms you’ll use literally every day in your investing life:
- Standard Risk Tolerance (SRT)
- Standard Position (SP)
- Risk Level (RL)
- Risk Positioning Factor (RPF)
Standard Risk Tolerance (SRT)
Standard Risk Tolerance (SRT) is your personal risk tolerance level. It is defined as the maximum percentage of your total portfolio that you are willing to risk losing in a single trade or investment, and it would not change a single decision or way you trade. For example, if you have a portfolio worth $10,000, and losing an entire position worth $100 would change nothing for you, then your SRT might be 1%.
It’s really important to know one’s SRT, because it is the basis for all risk positioning, and we believe one of the keys to riches.
SRT: The maximum amount of your portfolio, expressed as a percentage, that you are willing to risk losing in a single trade or investment, that would change nothing you do in the next moment or the next day.
Standard Position (SP)
The Standard Position (SP) is the dollar amount of your portfolio that you would allocate to a position at your SRT in the absence of a risk methodology. For example, if your portfolio is worth $10,000 and your SRT is 1%, then your SP is $100.
While your SRT is likely to be constant over your investing career, your SP will change as your portfolio value changes. But that said, we recommend keeping your SP constant at least on an annual basis. You can always re-calculate it at the beginning of each year.
Risk Level (RL)
In order to have a risk based methodology we need to define risk levels. We’ve tried many and observed way more. Some are complex calculations, while others are simply scales from 1 to 10. We believe that risk a relative thing, something that intrinsically we deeply understand, if it is expressed in terms we can understand. Therefore we set out to define 6 risk levels than everyone can relate to:
- Treasury Safe
- Premium
- Investible
- Speculative
- Cool
- Uninvestible
These RLs are based on the likelihood of losing the entire principal of an investment.
We describe each of these:
Treasury Safe
There’s nothing safer than a US treasury. Whatever its duration, you should fully expect to be repaid the principal, and all the interest due without issues. Thus we consider this the safest risk level.
However, if we limited ourselves to only Treasuries at this level, we’d get bored quickly. Therefore we expand the definition slightly:
An investment is “Treasury Safe” if it is highly unlikely that the principal will be lost; or if it can be lost, the period to loss is a very long time, with plenty of confirmed warning signs allowing for an exit.
For example as of 2025, no one would question preferred shares of a large, major bank such as JPM, or most government bonds, or bonds that are rated at the top tier of one of the bond rating agencies.
Premium
Premium risk sits just under Treasury Safe. Thus, it should be no surprise that this might include bonds that sit near the top of bond agency’s rating scale; it may also include preferred shares of a large, stable company with a long history of paying dividends. But it also includes the combination of an investible stock with an option strategy that can limit losses. In other words, the risk has a premium attached to it.