In the summer of 2025, Brian Portnoy asked me to write a chapter for How I Invest My Money: Volume Two. Volume One came out in 2020, co-edited by Brian and Josh Brown. The premise is for people who work in finance to explain what they do with their own money.
Volume Two comes out October 20 from Harriman House. There are 25 contributors, including Barry Ritholtz, Kyla Scanlon, Matt Zeigler, and Ben Hunt. Morgan Housel and Christine Benz return from the first volume to say what’s changed for them since.
My chapter is below the paywall in full.
The word limit was tight. What’s in the book is about a third of my first draft. When Brian read it, he offered a superlative about it being provocative (I won’t use the exact quote, which was pointy in a way that’s better kept private). I’m not totally sure how to interpret it, but either way, I’m flattered to have been asked, and hopefully you are not stupider for reading my chapter.
To read the other 24 chapters, preorder here: lnk.to/howiinvestmymoney2
How I Invest
Kris Abdelmessih
Odds are I’ve traded more options than anyone you’ve ever met. Twelve years as an option market maker on the floor of every exchange in New York City, followed by another decade as portfolio manager for an options hedge fund in San Francisco.
When you make markets for a living, your counterparties are investors. Market-making or trading broadly is a business. We can see business is good. If we’re winning, then investors, by the brutal logic of accounting, must only be getting filled when they’re wrong. The inference was obvious: trading was skill, investing was the sucker’s game.
Self-flattering, but wrong.
I overlearned my “be the house” mentality so completely that it blinded me to investing’s necessity. By my mid-30s, with a baby and Bay Area mortgage, I realized trader careers don’t last forever. I would need to bridge my excess savings to a future where my income wouldn’t cover my costs.
As Neil Peart once penned, “If you choose not to decide, you still have made a choice.” I had to figure this investing stuff out.
But just as renovation can be harder than new construction, I needed to assimilate my trading knowledge into an investing approach—not only for implementation, but for intellectual redemption.
Anchoring an Investment Philosophy: Three Core Principles
My approach starts with three core tenets I’ve wrestled with daily for decades—ideas that refuse to stay buried.
The Primacy of Edge
Whether you call it advantage, vig, alpha, or edge, you must identify positive expected value. Edge is the lifeblood of casinos and trading firms. If I bet $1 on heads for ten coin flips at 11-to-10 odds, I lose $1 on five flips but make $1.10 on five flips—a cumulative $0.50 profit on $10 wagered.
For businesses, there must be margin after all capital costs are replenished. Because feedback loops in investing span years, stories and randomness can mask this reality. But large sample sizes in trading converge on the truth quickly—edge is not optional.
No “Easy” Trades
Markets contain pockets of mispricing that appear due to constraints—regulatory requirements, collective preferences, or structural issues. But explaining the supply of opportunities is only half the story.
The reason markets are hard to beat is fierce competition for these opportunities. The majority of professional investors underperform their benchmarks despite being well resourced, incentivized, and obsessed. The sport of excess returns is exactly that—a sport where competition adapts and pushes back.
This creates the paradox of skill: when competitors are evenly matched, outcomes look random. The market becomes a blackjack table—a house advantage small enough to keep you playing, but large enough to ensure you don’t win long-term.
From literature showing active manager futility to crystal ball studies where investors underperform even with perfect foresight, the market appears random from most vantage points. The burden of proof that it’s beatable falls on the investor holding the reins.
Survive
Without edge, there’s no point to business or investing in business. But even with edge, you can’t collect it if you can’t survive. In trading, the first rule is never bet so big you can’t survive being wrong. Investing requires the same mentality. Any return times zero is still zero.
Mapping the Three Principles to Action
Map “Edge” to Risk Premium
The edge in investing is risk premium—the discount required to entice people to invest in risky assets. This logic works because there’s no alternative explanation: anyone with normal risk preferences would abstain from uncompensated risk.
But if the edge is just sitting there, how do you capture it? Is your return’s source active in the form of labor or passive in the form of patience?
Traders spend time and capital for information advantages—they’re paid for labor. If you’re passively invested in the S&P 500, you’re accepting this proposition: “Earn 3–6% above T-bills in exchange for 15% annual swings, 20–30% drawdowns every few years, and 50% drawdowns once a decade.”
Everyone’s invited to that party. The only prerequisites are time and bias toward inaction.
Market Efficiency as a Gift
Charlie Ellis called investing a “loser’s game”—like amateur tennis, you win by not losing. This frees you to focus on avoiding own-goals: tax hygiene, low fees, and wariness of fancy investments pitched to flatter ego over account balance.
Options pricing explicitly models opportunity cost, getting you to think marginally: What’s the marginal value of this action? If 100 hours of work earns 5% extra return on $10k, you’ve worked for $5/hour. But discount even that—investing’s signal-to-noise ratio makes it unclear whether results are repeatable.
Time is your greatest opportunity cost. Unlike expert endeavors like plumbing or coding, investing has limited returns to effort due to the paradox of skill. It’s a treadmill in a hazardous information environment where there are faint lines, at best, between input and output, making it difficult to learn from our decisions. Especially on the timelines we care about.
Internalizing this message will free you from FOMO so you can focus on the prescription for the third principle—survive.
Diversification Protects Wealth
Compounding implies repetition and multiplication. The multiplication creates those curves where 10% annual returns 8x your wealth in 21 years. It also explains why 1% management fees can devour 30% or more of profits over your investing life.
But multiplication has an evil twin: “volatility drag.” An investment up 10% then down 10% averages 0% return but loses 1% compounded. The compounded return is known as the geometric mean. The divergence between arithmetic and geometric means is proportional to volatility squared. While 10% up and down moves yielded a vol drag of 1%, if we double the volatility so our asset goes up, then down 20%, we end up with a cumulative return of −4%. Again, the average return is 0%, but the compounded return is 4x worse for a doubling of volatility.
Diversification reduces volatility by avoiding concentrated dependence on factors whose success breeds competition. A concentrated Nvidia investor crushed the market, but that market cap now attracts new entrants. Mean reversion is the mathematical articulation of a lagged response from competitors chasing success and ultimately diluting future returns for the industry.
Diversification is the only free lunch in investing. In fact, you can prove that diversification has an actual monetary value.
What would you rather own?
Portfolio A: a single stock with an expected return of 10% and 30% volatility.
OR
Portfolio B: an equal-weight portfolio of two stocks where each has 10% expected return and 30% volatility, but which are 70% correlated.
If you’d prefer B to A because it offers the same reward for less risk, would you be willing to pay at least $1 to own B? $2? The actual indifference point is abstract, but the concept is clear. Invert the logic. Would you accept portfolio A when B exists without getting paid extra for it? By not diversifying you are incinerating money.
Diversification is the key to reducing excessive volatility which threatens to drag your portfolio far enough under that it cannot recover on a relevant timeline. A portfolio that loses half its value needs a 100% return to recover. The ratio of compounded reward versus risk of a portfolio grows linearly with improvements in return, but quadratically if you reduce volatility.
Constructing My Portfolio
I split investments into passive and active buckets.
The Passive Bucket (60–80% of assets) captures equity and business risk premiums through low-fee, diversified vehicles. Despite the “passive” label, funds can be active—the point is my attention to them is passive. The job-to-be-done is survive the ride.
The most important aspect of portfolio construction is sizing. How much equity exposure you have in the first place has a greater impact than whether you chose SPY or QQQ. But how do you size? Many people let their conviction decide. The names you like best, you invest the most in, right?
That was a trap. I challenge you to rank your investments by size and see if the returns line up in the same order. That’s Gold Medal level performance. Stop reading now, because you’ll have nothing to gain from my humble approach which assumes I can’t forecast returns.
I use “volatility first” sizing. This means working backward from tolerable drawdowns rather than forward from expected returns. If you can’t lose 15% in a year, allocate a maximum of 30% to stocks, assuming 50% max drawdowns are possible. I also track the cross-correlations of my holdings to ensure the construction of my portfolio actually benefits from diversification. When it comes to risk, SPY and QQQ are quite similar. Looking at the correlations means not being fooled into thinking I’m diversified just because the tickers are different.
The Active Bucket targets situations where effort creates genuine edge: local opportunities with uneven information (real estate, private loans), or strategic positions where you have the ability to make your money “greener” than others’. This means occasional early-stage investments as advisor or LP, usually with close relationships, where we asked to invest rather than being pitched, to minimize the risk of adverse selection. My single greatest financial investment came from this process. You’re not going to find it in the private equity (PE) fund your private wealth advisor is pushing. You have to find the people who don’t want to take others’ money and convince them.
For active investments, I lean toward the most robust risk classification: admitting it is “unmeasurable,” marking everything at acquisition cost until liquidity events. Since holding in this bucket can get zero’d, monitoring bucket size already considers max loss.
The sizing of the overall bucket is naturally constrained by the low velocity of opportunity. I’m not out there actively hunting for private investments, and we size them carefully since they have significant chances of going poof.
It’s worth noting that this sizing is not by design. It depends on the opportunity. While I dislike the term “deworsification,” if you were not allocating enough to a private business you are building, one in which you could see the secret—that the returns to invested capital are a reason to devote all your time to that business—then deworsification is a fair condemnation.
Beyond the Portfolio
The highest risk-adjusted returns often aren’t in your brokerage account—they’re investments in yourself. Capabilities and income compound more powerfully than squeezing basis points from portfolios. Converting financial capital into human capital runway can yield exceptional returns if you have a point of view and persistence.
Trading taught me explicit opportunity cost thinking: every “yes” carries shadow prices of all the “no’s.” Time spent stock picking could build skills that compound for decades. Unlike alpha, human capital doesn’t require someone else losing for you to win.
The beautiful paradox: the most “trader-like” thing I do as an investor is refuse to play most games. In trading, survival was often the winning strategy. In investing, that principle scales across decades.
My framework isn’t about home runs—it’s about harvesting market returns with minimal leakage. Respecting efficiency, accepting risk as what Morgan Housel refers to as an “admission fee” rather than punishment, and protecting compounding’s fragile magic.
The market is indifferent about your bills, your timeline, or your ego. It offers a simple bargain—bear risk over time, capture returns. The only edge that matters is the one you can live with long enough to collect.
In a world of infinite stock tips, crypto stories and hype at the speed of electricity, identify your shortlist of core beliefs and let them anchor your process and more importantly your focus. That is your most valuable asset.