It’s not easy to make an investment and watch the price fall. But it’s the risk you take when you invest. There are no guarantees in the investment world. But you have tools to use to manage and limit risk.
Calculate your tolerance level. Think about, what you expect of your investment and how much risk you can take, so you either can sleep or your life does not change.
Look at it this way: You aim for an upside that is at least 5x your downside.
If you think a 100% gain is a reasonable expectation, you’ll tolerate a max. 20% fall (5 X 20 = 100%). Or, if you think a 400% gain is within reach, you’ll tolerate an 80% fall (5 X 80 = 400%). If you’re aiming for 40% returns, then an 8% dip is acceptable. And so on.
If you look at 500% or more than you are willing to risk all.
How much risk you tolerate should be a function of both your upside and your downside. Without realizing it, anybody buying a lottery ticket operates on this principle. Lottery participants are perfectly willing to lose their entire investment.
Of course, you shouldn’t use money you need to pay the bills. For this type of investment use play money. Another factor to consider, of course is the probability of your investment making the money you expect.
Now, this is just a tool to manage risk. It’s based on the simple premise that the more money you think you can make from this type of investment, the more risk you should take to make it work.
Sven Franssen