How Much Are You Willing To Lose on an investment?
A Short interlude and reminder to myself. This is not a “How-To” article, Maybe something that you can read over before you are thinking of making a big investment. This is a question that I pose to myself anytime I feel that I need to put my money towards more assets.
How much are you willing to lose on an investment?
Money is meant to grow just like we humans are made to grow.
Learning how to make your money compound over time is an essential skill for building wealth.
Knowing how much of a percentage you are willing to risk on your capital is an important skill.
Your decision-making process and the risk-management strategies you use will be completely different in each of the above scenarios. It’s important to realize that your goals matter. The more you understand your own goals, the more likely you are to achieve them. People never set specific goals so people never make the right investments that align with their value system.
And consistently achieving the goals you set will make you a successful investor…
Let’s face it, no stock purchase will ever be risk-free… Taking risks gives investors opportunities to succeed. But different stocks have different levels of risk… And those levels can vary dramatically. So how much risk is the right amount? there is no one-size-fits-all answer. It all depends on your level of risk tolerance.
Start by looking at your investing goals. Can you reach your goals by gradually growing your money over a long period of time? Or do you have lofty goals that require big gains quickly?
Also, remember that different portfolios can handle different levels of risk. A large and carefully diversified investment portfolio can usually rebound from a loss due to a risky investment, while a smaller portfolio could be destroyed by too many risks or even one big risk.
Consider, for example, two portfolios — one with $25,000 and one with $250,000. Now, consider how different losses could affect them:
Losing $5,000 in the $25,000 portfolio would be devastating. It would cost you one-fifth of your savings. But a $5,000 loss in the $250,000 portfolio would only be 2%.
Yes, It’s a simple example, but people don’t think like this.
Risk the money that you can afford to lose! If you have to wait until you have $250,000 in an investment portfolio to take a 5k loss, wait until that time.
Position sizing is so important to you as an investor.
What is position sizing? It’s putting the right amount of money into your investments relative to your total portfolio size. It’s a mandatory concept to grasp but you have to think about something that most people don’t want to think about: How much you’re willing to risk losing on any single investment?
A good rule of thumb is to risk no more than 4% or 5% of your entire portfolio on any one idea. If you’re risking 4% of a $25,000 portfolio, you’re limiting your potential loss to $1,000 on each investment. If you’re risking 4% of a $250,000 portfolio, then your potential loss would be $10,000 per investment.
This article is just a reminder to the person who is always looking to acquire wealth as quickly as possible by investing their all in projects that seem like they could have great upside potential.
This is the article for the person who is not investing enough as well.
Keep growing your money, and do it the smart way.
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