Unlike the conventional trading wisdom, in reality our accounts are highly variable:
1. Income: we add (or remove) savings into account of choice every month
2. IRA: the IRA accounts are limited by regulator, taxation and account maturity limitation. It makes sense [taxation-wise] to keep IRA account for ETFs with zero risk of ruin and high expectation of profit, disregarding the momentary drawdown possibility [manifested in asset diversity parameters].
3. Brokerage account: the brokerage account, being most versatile investment tool, is also most independent. However, it is very upsetting to handle multiple kinds of portfolio under one account.
4. External bank account: not all of our money is connected to trading system. It may be that the trading accounts gets high drawdown and will need cache injection for rescue….
5. Paper trading: not all the trading we are dreaming to do we need to actually execute. We can as well do some paper trading to check our theories.
We assume there is no trading of corporate finances, since this practice requires higher level of involvement.
Below is a possible tactic scenario:
1. Define target size portfolio, say the portfolio you want to own 5 years from now
2. Rebalance the portfolio so that some assets are in actual bank accounts, and some are on paper accounts
3. As money flows in and new accounts open, rebalance back from paper accounts to real accounts or between real accounts in real bank
3. When the target portfolio is 60% or 80% full – and it may well be below 5 years – define a new target portfolio by scaling up the portfolio size
“Paper trading” is crucial for proper account scaling up and building mature portfolio. However, only a part of trading should be done on paper as a part of general rebalancing.