Ask Colin

I have capital of only $50k. Is your maximum investment of $6k in one stock appropriate, or should I go larger?

This question cannot be answered in isolation. It depends on the rest of your investment plan. If you lower risk in another area of my plan, then you could think about increasing risk in this area of my plan. What my plan tries to set is a balance that is appropriate for me - my needs, objectives, experience. skills, personality, risk tolerance and so on. You are going to have to answer this one for yourself, because I do not know enough about you or the rest of your investment plan to even start to suggest an answer.

What you are going to have to do to answer this question for yourself is to think through all the areas of risk in your investment plan. Then you write down the plan. The next step is to go back a decade or so and trade the plan on paper. See how each investment feels and what happens to your capital, so how the overall outcome feels. The future is never exactly the same as the past, but trading the past on paper will teach you a lot. You should try to trade it on paper over both trending and non-trending markets and over bull trends and bear trends.

As you find areas of your plan that do not give the outcomes you want, you will need to vary the plan and test it again. Eventually, you will develop a deep understanding of how the plan is likely to operate, what results you can expect and what challenges you will have to deal with.

That is the first step. Next, you start trading it with real money in a small way - ie only part of your capital. Gradually you will hone your plan until you feel you can take it fully into the market with all your capital. Depending on how hard you work this will take you 5 to ten years before you have a plan you can trade with implicit trust and real skill. You will have lots of fun in this time - on paper and with real money and learn a great deal about yourself.

My contribution to your journey is to make available to you some of my experience, to hopefully help you with what should be in an investment plan - what risks you have to manage - and perhaps warning you of some of the pitfalls. However, in the end everyone must make the journey for themselves. It is intensely fascinating. If it is not, if the hard work and hard thinking turns you off, then, sorry, but investing or trading is not what you should be doing.

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