Monday, April 14, 2014
Have you followed the "fifty-five-ten" rule?
Last week, I went out for dinner with my publisher Porter Stansberry and a couple of fellow S&A analysts. We were talking over basic rules of thumb for traders.
By traders, I mean folks who want to make short-term bets in the market: positions – sometimes leveraged – that you hold for a few hours, a few weeks, or a few months. For folks new to the market, this can be a lot more dangerous than buying big, dividend-paying blue chips and holding for the long term.
If you're not an experienced trader, it's easy to lose a lot of money in a short amount of time. So we were talking over the best advice we could give to readers...
"Subscribers aren't going to want to hear this," Porter said. "But here's what we've got to tell folks who want to start trading their money: Just don't do it. Don't trade. Not unless you can do three things..."
The first thing you've got to do, Porter explained, is save $50,000.
That might sound like a lot of money. But if you don't have the discipline and the kind of income that it takes to put away at least $50,000, you shouldn't be trading...
When you have your "rent money" on the line, it's hard to accept a loss. You get too emotional. And you're going to end up in trouble. A good chunk of current savings and a large current income will give you a better chance at making rational decisions.
Plus, as Porter outlined in a recent edition of his Stansberry Radio podcast, most people can't expect their trading to generate more money than their current income.
In short, you're better off concentrating on increasing your income – and your savings – than you are spending time trading.
My friend and colleague Mark Ford does the best work I've read showing folks how to substantially increase their income in as little as 12 months... In fact, he built a club to help teach folks exactly what to do. You can learn more about it right here.
Even if you already have $50,000 in the bank, you still need to take another step before you start trading... You need to string together five years of successful investing...
In other words, you need to "practice" making money in the market with longer-term ideas. You need to learn how to value a business, use proper position sizes, and develop the habit of cutting your losers and letting your winners run.
If you're eager to start trading, five years might sound like an absurdly long time to wait. But like discipline, patience is a key skill for any successful trader.
If you need help here, you should get to know my colleague Dan Ferris. Dan is one of the most skilled business analysts I know. He has probably taught me more about what makes for a high-quality company than anyone. If you're serious about investing, you should take a look at his work. Click here to learn more.
Finally, once you've saved plenty of money and once you've gotten a lot of market experience under your belt, you can start trading... But you should only trade with 10% of your portfolio.
My Growth Stock Wire colleague Jeff Clark explained this idea awhile back...
In other words, go ahead and take a little risk with your trades... But make sure that risk is small in the overall context of your portfolio. When a bet turns sour, your conservative investments can more than make up for your losses.
In sum, here's Porter's "fifty-five-ten" rule:
It might surprise you to hear "don't trade" from someone who publishes a trading service... But as Porter said at dinner, "It's what I'd want to hear if our roles were reversed."
Amber Lee Mason
Find more of Amber's advice for successful trading right here:
Two Trading "Rules" You Should Consider Breaking
What you're about to read may shock you...
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This Big Trading Mistake Could Cost You a Small Fortune
Today, I'm going to cover one of the most important lessons you'll ever learn as a trader...
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