"Can You Still Afford New Underwear?”

06/16/2010 12:01 am EST

Focus: STRATEGIES

Stephanie Radkay

Vice President, RDS Trader, LLC

How much convincing does it take for you to try something new? Do you Google the idea and research and test and tweak until you are blue in the face before you pull the trigger? Do you ask 500 of your closest friends if they've experienced it? Or, do you dive in without hesitation? Good for you if that's the case. I personally don't like to make mistakes if I can help it, but I understand that making mistakes is where the growth and the goodies lie, so I accept the fact that mistakes do happen. I also listen to others when they are kind enough to share their pain so I don't fall into the same situation. Some like to make their own mistakes even if they know the pain is a-comin’!

So maybe you are wondering what this has to do with investing. Since we can never really know for sure where the market is headed, we need to get involved in investments where we have the highest-percentage chance for success. We definitely don't want to make mistakes with our money again. Notice how I said "need?" Yes, we need to get involved in the markets because our 401(k)s and our savings accounts are just not going to cut it in the long run. Agreed? We need to take on some risk.

But, we all have different risk tolerance levels and each market has its own speed and movement, which, for us investors, translates into risk. The media makes a big impact on our decisions, which I find quite interesting because they are always looking at the big picture. That's okay, but where does our tolerance lie? Doesn't it pain you when you look at your investment statements and you can't find your money? Your broker tells you, "Don't worry, you are in this for the long haul." Depending on your age, how much long haul do you have to give it? Do you really have the patience to wait? It takes so long to make up the capital when you lose. What if you could take on similar risk and have the opportunity to make money a little faster? I ask again, do you really have the patience to hold on for so long? Most don't. Maybe you should look at the smaller picture because maybe that's where your patience and tolerance lies.

Many investors pulled their money out of the markets in 2008 and 2009 and still haven't gotten back in. You can bet when they do get back in, they are going to make the same gosh-darn mistakes. Painful! So, what do we do about this, you ask? Well, as we always say, "It's time to take on some of that risk yourself, but with responsibility and clear thoughts that make sense to you." So, we head over to the trusty RDS risk calculator to help make sense of it all.

When we enter our account value into the risk calculator, it gives us an idea of how much money we should be willing to risk each day and on each trade (in percentage terms). We personally don't like to lose more than 5% of our account each day. If it feels like even that is too much, you can minimize the calculator percentage parameters. Once these parameters are set in place, they are not meant to be broken! You must follow your risk plan day after day! If you are able (and some are not) to abide by these parameters, you will give yourself the gift and the opportunity to come back and trade day after day. Everyone says they would never break their rules, but inevitably you will, and the one time you break the rules, we hope it doesn't cost you your lifeline. 

Risk parameters are key in every investment decision. You plan what you are willing to risk and how much pain you are willing to take, if any. The RDS risk calculator covers 25 futures and forex markets, and taking into consideration daily volatility, you can compare your risk parameters with each market to determine if you are properly capitalized for the market you are already trading or are considering trading. Oftentimes, clients come to us and say they want to trade the e-mini S&P's (who doesn't, right?). When we go through the risk calculator with them, they quickly come to realize how undercapitalized they would be with what they thought was completely appropriate. This reminds me of the first time we went to buy a home. We met with a mortgage broker and he told us how much we could borrow. We had no idea we had so much buying power. Then the truth buster came in the form of my father when he said, "Look at your bills. You know what you can afford right now? Compare that to what the monthly bill would be if you borrowed that much money for your new home. Could you still buy underwear?" So of course, we changed brokers and took on only what we could handle. Sound familiar?

Take the time to see if your investments resonate with you and your personal risk tolerance. We are not all the same, and just because society “says" this is the way we do it, buyer beware! Trust your gut and your accounts will show it! 

You can't win if you don't play! Prosperity is at your fingertips! All you have to do is grab it!

By Stephanie Radkay of RDS Trader

Financial experts and mentors Mike and Stephanie Radkay publish RDS Trader E-newsletter. If you are ready to “Take back your power, Invest with confidence, and Protect your assets,” get your free tips now at www.rdstrader.com.

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