Tuesday, March 29, 2011

Handling Your Own Financial Future

It is going to be 50 degrees here tomorrow and then snow on Friday. About a foot of snow. Unreal.

Handling Your Own Financial Future
It occurred to me this past weekend that I have never really discussed how to get into trading or investing on this blog. I think there are twp major reasons for that. One, I figured most that stop in here already had their stuff together. Two, it's not my place to offer that kind of advice.

That said, I figured a quick little big picture post may have some use for anyone wanting to take part in their financial future instead of handing money off to funds and managers to handle. There is nothing wrong with that of course, and this post is in no way is advice to pull all your capital and go crazy in the markets. As of late quite a few people have asked me how to best start handling their own finances, so here is my run down.

I am sure this topic has been covered a million times elsewhere, so forgive me if this is all boring.

1. How Much Capital Are You Willing to Risk
It all starts here. You have to be 100% honest with yourself right from the start on a dollar amount you are comfortable putting at risk. This is the big step and the most important. If you are using rent money or this week's grocery cash to start investing, it will not work out and you will have zero fun. On the flip side, opening a trading account with $100 is going to limit your ability to do very much. All investment is risk, a form of gambling that is legal. Every time you put on a position you are risking it all (in a sense).

2. What Kind of Investor Are You
The type of trader you want to be is the next step. If you work 50 hours a week or more at a real job, daytrading will probably not work out and maybe will get you fired. Are you the type that likes to play long term macro plays which form and move over months or would you like to focus more on a weekly look? Maybe you work in a field that interests you and you can focus there as you already have some knowledge in the arena. You need to decide how the bulk of your positioning is going to be.

3. Read
After steps 1 and 2, now you have to read. Books are ok, but the real pulse of the markets and economy can be found on the blogosphere. The MUST READ column at the left on this site is a good place to start, then fill it out with sites you find that add value. While in no way to you have to read everything at all times, you need to understand current dynamics and how things flow.

4. What Kind of Trigger Will You Use
There are just too many ways to pick an idea to try to cover here. I have always used simple candle stick charts with a few indicators added for most of my ideas. A cool screening tool like The PPT can add real time saving value after you get to know it. There are a million services out there to choose from but many are not worth the time. You will have to decide under what triggers you are going to open a position.
(Note: No affiliation with The PPT; I am a subscriber)

5. Test Run
No one should ever jump right in and put capital at risk. Luckily you can test your ideas out first. FreeStockCharts is a service that allows you to book a portfolio and then track performance. The basic package will only cost you an email sign up. Using your system trigger start "trading" by selecting stocks for a portfolio. Monitor them as a test environment. At this point you may see your trigger system is either not working at all or you are not using it right. You may find that you are just really unlucky and need never trade in real life. You may find you cannot lose. In any case, play with play money first so you know what to expect. To go to the next level, set up the virtual account the same way you will set up your real account. Then test some more.

6. Start Small
After the 5 steps above, it's time to get to work. I would assume you have a trading service at this point (there are quite a few, shop around). In step 1 you decided on an amount to fund your account with. Divide that number by 3 and transfer the cash to your account. The 30% is arbitrary, but you should start in at that area. I think this is the best way to open activity and keep fear levels down at the start.

7. Notes and Honesty
The first month you will need to make notes about what you are doing. I am old school and use a leather planner to write down my ideas and trades. You new age folks can use some kind if electronic notebook or just post all your trades on Facebook (kidding!). Keep detailed notes about everything; what you were looking at, how you felt about a position, where you are going to sell if you are up, and where if you are down. The biggest thing to stick to here is to be honest. You may be tempted to delete or forget bad ideas or trades that went south to pretend it did not happen. This will not help you out at all and is the single biggest money loser I see among the small type traders I know in real life.

8. Assessment
After 3 months, how are you doing? All things being equal (a normal market, no major sell off or monster moves up), how do you stack up? Again, be honest. While nothing is certain, if you have studied and tested your system you should be performing within the limits of your test results. At this point it is decision time.

9. Commit or Quit
If you had huge losses after three months you need to go back to step one and try again using another angle. This will restart the entire process. It is a huge commitment. While there are a million ways things can go wrong, if your system is not working out you need to stop and not put the other 70-80% of your money into this. What would be a loss figure to decide this on? I think if you are down 30% in 3 months you need to rethink the whole thing.

If you came out even, slightly up, or really up (one can hope!) you need to decide right now how much time to commit to this. You will know how much effort it took by now to get to this point, can you keep it up? Will you do homework and try to get better? Again, be honest. If you are happy with how things went, go ahead and deploy your target amount in step 1 to your account.

Not quite 10 steps.

I hope this helps anyone that is in this position.

Lightsaber Factory?
Any real Star Wars fan knows that a lightsaber is constructed by a force user in a dedicated way that uses the Force to align the crystals in the handle to form the blade. Still, this video is really cool. A steel factory has a backup of molten steel and it looks really wild (hat tip Geekologie):


Have a good night.


David Batista said...

Wow, this entry was tremendously helpful for me. I'm one of those people who knows nothing about the market and how to go about investing. And I wouldn't have the time or interest to micro-manage my investments on a day-to-day basis, either. So I guess, according to what I 've read here, I would be more of a long-term kind of investor, huh?

You know, all of these steps seem like a really common sense approach very much in line with what I was thinking anyway. Except, that you cite examples and point to resources that I would have never known about. I'm not ready right now to get into this, but I'm going to keep this entry bookmarked for future reference.

You opened up my eyes and started me thinking, GYC!

Imperfect Reason said...

Are you talking about investing only via the stock market? Do you play with other investment products as well?

Patti Hysell said...

Whoops, Imperfect reason doesn't really exist any more, at least not at blogspot.

Jennifer Hillier said...

Finally, a post I can understand!

I echo David - tremendously helpful. Thanks for writing this.

Anonymous said...

"the real pulse of the markets and economy can be found on the blogosphere. The MUST READ column at the left on this site is a good place to start"

Hold up there Get! While I agree that some sites on your "must read" list are pretty good, most have a clear bearish slant (which hasnt worked out too well for the past 2 years), and worse, some of them are much closer to escapisim "doomer porn" than they are to any semblance of reality.

Take "the Automatic Earth" for instance. Are you kidding me? These guys have been calling for "imminent, catastrophic deflation" for over 8 years now. They are so convinced they are right, that the "there can only be deflation" that they reject any and evidence to the contrary no matter how damning that may be.

Moreover, given their effective writing style, anyone who was persuaded by their "the dow will hit 1,000 by the end of 2010" has been financially devastated.

Again, im not saying they are all bad. Big Picture, Kid Dynamite, etc are some quality sites with a good contrarian slant to them. And as much as you hate him, you are remiss to not include perhaps the most objective (occasionally bullish/ occasionally bearish) site out there, Calculated Risk.

You may think all your readers are experienced traders who can parse the BS, but look at your responses above. It looks like you have a couple of newbies out there. As such, you should trim your "must read" list, those sites which have at best a toehold on reality.

Anonymous said...

Sorry, I didnt proof that last message before I sent it. Hopefully, my thoughts come across clear enough.


watchtower said...

GYSC, looks like you got a pretty good responce to the financial part of your post, so in deference to the 'Lightsaber' part I submit this:

NASA Spacecraft Snaps 1st Photo of Mercury from Orbit

"The first spacecraft ever to circle Mercury has beamed home the first-ever photo taken of the small rocky planet from orbit..."


There is a link to more pictures in the article too.

watchtower said...

Ugh, I've misspelled 'response', thankfully the grammar nazi's have yet to find this site : )

Sondis said...

Agree with limiting the Must Read sites. Zero Hedge and Market Ticker should come with warning labels:

"Warning this site is for terminal pessimists only. We will highlight only negative data points, and take a shit on anything that is positive. We proclaim with 100% certainty that this or that will come crashing down, and then when it doesnt, ignore the fact that anyone who listened to us lost a hell of alot of money. Also, even the slightest dissention from our worldview will get you banned from our sites."

Cant say anything about the rest of em. All I know is I used to think Tyler and Karl had a good handle on what the hell was going on. Now I realize they are more of the "stopped clock is right twice a day" variety.

getyourselfconnected said...

Wow plenty of comments, nice to see.

it's a reasonable outline how to get started. I did basically this years ago only I did not have all the tools and info avaliable today. Glad you liked it.

I love your history site and stop in very often! I trade anything that seems like a good bet; bonds, ETF's, bullion. I do not trade options, it's a bit over my head.

So glad you liked it!

@Anon and Sondis,
I understand my blogroll is populated with some bearish writers. There are still plenty of neutral guys over there as well. I meant using the blogroll as a starting point, but yes if you only hit Market Ticker or ZH that may not be the best starting spot! All the sites I have listed add real understanding or value, at least to me. I don't read comments most places anymore, you know why. Calculated Risk is a great data stop, it's more of a persoanl thing going way back. Thanks for the input guys!

I have been waiting for that probe to make it to Mercury! So exciting. Cannot wait for the real hi-res pictures to come out.

my spelling is atrocious so no worries.