How Much is my Portfolio Worth? ... What Portfolio?

Every so often, I receive an email asking how much my portfolio is worth, and my answer is always "What portfolio?". I am a professional trader, which means that I do not have a portfolio (in the usual sense), and that even if I did, its value would be meaningless. Let me explain.

Portfolio

Buy and hold investors have portfolios, the value of which is based upon the value of the stocks that they are currently holding. This value is unrealized profit and loss, which means that when their stocks move upwards, the value of their portfolios increases, and when their stocks move downwards (yes, stocks do move downwards), the value of their portfolios decreases. Portfolios can range from single stock portfolios, to multiple sector portfolios, to portfolios containing a wide range of financial instruments (stocks, physical commodities, bonds, etc.), but they are all primarily based upon unrealized profit. Financial advisors always suggest having a diversified portfolio so that it will be protected against any adverse price movements in any individual stock (or sector, etc.). However, the problem with this is that it is still a portfolio whose value is based upon the underlying instruments' value, and its value is still therefore affected by any downwards price movements (this year is a perfect example of this).

Trading Account

Professional traders have trading accounts whose value is based upon the amount of cash that is currently available for withdrawal (i.e. how much money could be withdrawn from the account without exiting any positions). This cash based value is realized profit so it is not affected by any price movements of any markets (except perhaps the currency markets). Additionally, professional traders make their living from their trading accounts (as opposed to saving for their retirement), so they usually withdraw a substantial portion of their trading account each month (leaving just enough to cover their trading's margin requirements). For example, if a professional trader needs $50,000 in order to cover the margin requirements for their trading, they will keep their trading account's value at $50,000 (no more and no less), and will withdraw any additional cash at the end of each month. So, asking a professional trader what their portfolio is worth, is an meaningless question.

Realized and Unrealized Profit

Aside from the trading style itself, the main difference between an investor's portfolio and a trader's trading account is the type of profit that is used. Portfolios base almost their entire value upon unrealized profit (anything other than cash), whereas trading accounts base their value upon realized profit (cash, and only cash). Amateur traders often believe that the difference between unrealized and realized profit is insignificant, but professional traders know that it can be the difference between making and losing money. If you have aspirations of being a professional trader (which I assume you do if you are reading this), stop thinking of your account in terms of a portfolio, and start thinking of it as a trading account with a cash value.