Risk and Money Management

What is Risk?

'To what degree is the probability of a future loss.'

Risk is the uncertainty of factors that affect whether the money you invest (risk) will produce the return you anticipate.

- To many people, risk usually means danger and loss.

- And to others, risk means opportunity and profit.


One thing is for certain. Risk is inherent in all forms of investment, and the traders that are the most successful at managing risk are the most successful traders.


The 'Terrible Two's' of Investing

There are a couple of major problems with investing for retirement, in any age group:


1. You need to reach your financial goals well before you die, so you have time to enjoy the fruits of your labor.


2. You need to outpace inflation on the returns you are getting from your investments. Inflation is the loss of value on your money over time. For instance, in 2008, the goverment reported that the inflation rate was 3.8% - so if you had $1,000 at the start of 2008, by the end of 2008 it would have had the buying power of $962. And since the the prices of most consumer items, food, rent, cars, etc, have gone up, you wouldn't have been able to buy as much as you could have at the start of the year.


Since investments in cash / money market fund are currently only paying about 2%, then it doesn't make financial sense to put all your investment capitol into a savings account or money market - in 20 years you would actually have far less buying power than you do right now. You have to have higher returns on your investments than that.


What is My Risk Tolerance?

Few aspects to stock market trading and investing are more important than risk and money management, and knowing what balance is right for you.


It's simple, really, if you take too much risk while investing, then you will eventually lose big, and possibly lose all of your initial investment capitol.


On the other hand, if you don't take enough risk while investing you could end up financially short. For instance, if you put all your money in a no-risk, no-gain savings account throughout your entire investment lifetime, then you would still have all your orginal money invested - your investment capitol, but you would only show a minimal return on your investment. It's also true that the power of multiplying your money over time can be a very powerful thing, but it would take decades most likely, earning 3% on your money, to attain substantial financial results.


So, how do you figure out the balance of your, what is commonly called, Risk Tolerance level? It's all about your own comfort level. What path feels natural and right to you.


Maybe, for you, it comes down to a particular standard of living you would like, and which financial goals you truly want to reach in your life. Do you want to retire early? Do you want to just replace the income you have currently when you retire, or do you want to own two houses - one on each coast? How many children do you want to have? Will you help them through college? Do you want to have the money to travel? But perhaps most importantly, how soon do you want to reach any one and or all of these goals? In 5 years or less, or in 40 years? Your goals heavily influence the investment path you will need to take.


If you are driven to have more than "...just getting by", this will affect which investments you need to venture into to reach the lifestyle you seek, and in the time you want to reach them. Risk tolerance is probably different for each person, and for most of us it can be difficult to understand and manage.


For other traders, the lure of faster profits drives them to push the financial limits...to take investing more to the extremes. To trade in more aggressive investments like stock options and futures contracts, large real estate development projects, speculative land deals, oil wells, and the list goes on and on.






Do you remember that I-N-G banking commercial?...'What's Your Number?...' In the ad, people are joyfully carrying around their retirement numbers (literally,...like a loaf of bread under their arms) That commercial sums up nicely the essence of risk, goals, and which path is right for you.


To be successful as a trader and investor, you must learn to manage risk, but that doesn't mean you have to sacrifice a healthy return in the process.


So, "What's Your Number?"...


Emotional Risk in Trading

Some people tend to believe a myth about risk and money management - risk and making above average returns on your money go hand in hand. This is not always the case. Some of the wealthiest investors and traders of all time, like George Soros and Warren Buffet, have been very successful investing in a wide array of risk levels, but the key difference comes down to one word - timing!


If its possible to follow trends in the stock market consistently over time, year after year, then wouldn't that minimize your risk investing or trading in the exact same investments you normally would, but would be more timely and profitable? Again, timing is key.


Emotions play such a large role in investing. Controlling your emotions can be a very difficult thing to do. Retail investors tend to let their emotions control their actions, and do not approach investing from a sound, financially stable point of view. The professional traders help mitigate risk by keeping their emotions in check, and keeping an eye out to see what retail investors do, before they make their move.


Balanced Portfolio

What is a portfolio, and why do I need it balanced, of all things??


Your portfolio is your holdings of cash, stocks, bonds, foreign stocks, commodities, etc. You need a balance of these investments for diversification (You reduce risk by spreading your money throughout different sectors of investment).


A balanced portfolio is another way of saying..."by taking into account your risk tolerance level, your income level, and your financial goals, what mix of investments, and in what percentage of each, should you own to reach your definition of financial security?"


20 to 35 Age Group

If you are 20 to 35, then you can afford to be alot more aggressive in your investments, because if you lost the majority of your investment capitol, then you would still probably have time to re-group financially and try again later on in your life.




The interesting thing about your 20's and early 30's is that you have all this time, and nothing to spend it on! Meaning, that when you are that young you really haven't reached your maximum earnings potential, so naturally, you probably won't have alot of investment capitol to be aggressive with! Oh, the Irony! But if you do have the capitol, make it count!



35 to 50 Age Group

Most millionaires become millionaires in their 40's. If you are between the ages of 35 to 50, then more than likely you have substantially more investment capitol to invest with, and hopefully you are wiser with your money and investments as well. Your investment portfolio should reflect this fact. However, if something goes wrong with your investment plan at this stage of the game, then you may not have time to recooporate if you suffered a severe financial loss like you would if you were younger.





60 and older Age Group

People in their 60's, 70's and even 80's are all about capitol preservation and income. This is the time, assuming you have a large nest egg you've earned throughout your investing lifetime, that you play it conservatively and keep most of your money in cash and other lower-risk investments. If you are in this age group, you would have very limited time to start all over again if financial devistation would strike you.





The Time is Now!

"Start Young!" The time to start investing is when you are younger, say in your twenties, because you have so many more years to enable your money to multiply on itself to make you even more money (The Power of Multiplication), that you can invest fairly conservatively over a lifetime, and still have made a fortune by the time you are 50 or 60.


If you aren't 20 or 30 anymore, then a more aggressive portfolio is likely in order, but you need to be sure to keep risk and your emotions in check, and follow your own sound financial judgement to heightened returns.


The 10% Rule!

Pay yourself BEFORE you pay others. Start an online trading account with TDAmeritrade, Scott Trade, or another reprutable brokerage firm, and deposit 10% of each paycheck you get into that account. Find "Your Number", and layout a realistic set of goals to attain that number, taking into account inflation, risk, and income growth. Always follow a wise portfolio balance that is right for you that will meet or exceed all of your financial goals.


Our Risk Philosophy

We believe that investment risk can be reduced dramatically by a successful swing trading methodology, following realistic goals, and above all proper money management.



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