Invest Only What You Can Afford to Lose
The phrase “only invest what you can afford to lose” often gets thrown around in investment circles. However, it's more than just a casual piece of advice. At TOR Trading, we believe this concept goes beyond the basics of avoiding financial ruin.
- What it Truly Means: The core idea behind afford to lose isn’t just about money in your bank account. It’s about having the financial capacity to replace the money you invest without impacting your day-to-day life. This means having enough resources to continue living comfortably, paying your bills, and maintaining your lifestyle, even if your entire investment goes south.
- Building Replacement Income: For many people, this translates to having multiple streams of income. This could include income from traditional employment, side businesses, investments, or even profits from separate trading accounts. Having backup funds through alternative sources can act as a buffer. We will dive deeper into strategies for creating diversified income streams later.
- The Psychology of “Losing” Money: Risk tolerance varies greatly among investors, and afford to lose isn’t just financial—it’s emotional. Some people may financially handle the loss but mentally struggle with it. We recommend performing a personal audit to assess not just your finances but your emotional tolerance for risk, loss, and uncertainty.
Where to Allocate Funds
Proper fund allocation is essential to both protecting your assets and ensuring you’re financially secure before embarking on more high-risk activities like swing trading or day trading.
Step 1: Savings Account First
The cornerstone of risk management begins with setting aside funds in a separate savings account. Conventional wisdom suggests saving enough to cover six months of essential expenses. This creates a safety net, ensuring that if you encounter financial setbacks (whether from trading or life’s unexpected events), you won’t be left vulnerable.
Step 2: Build Your Investment Account
Once you’ve built a solid savings account, the next step is establishing an investment account. This account should focus on long-term, relatively lower-risk investments like index funds, bonds, or dividend-paying stocks. This helps you grow your wealth in a stable way over time.
Step 3: Swing Trading Account
As you gain experience, the next step in fund allocation is to create a swing trading account. Swing trading involves holding positions for days or weeks to capitalize on market trends. It requires more active management than long-term investments but is still less demanding than day trading. Start with a small portion of your overall portfolio here and increase it gradually as you gain confidence and experience.
Step 4: Day Trading Account
The final piece of fund allocation is for day trading, which requires both the highest level of experience and the most liquid funds. Day trading involves rapid buying and selling of stocks, often within the same trading day, and it’s the most time-consuming. We recommend keeping this as the smallest portion of your overall portfolio unless you’re fully prepared for its demands.
By following this progression-savings, investment, swing trading, and then day trading-you align your financial journey with your experience level. This also allows you to mitigate risk by keeping more speculative ventures like day trading in check until you’re ready.