It's probably only after you've experienced the pain of losing half your bank on that one "can't lose" trade that'd you'd ever consider money management to be an important part of investing.
My wake up call came when someone pointed out some simple maths - if you were to lose 50% of your bank then you would need to make a profit of 100% on the remainder just to get back to your starting point.
Do the sums:
Start with £1,000 and lose £500
You now have £500
You need to double your money to get back to your original £1,000 bank
Making a 100% profit buying and selling shares is always going to be tricky so for me it's a far better idea to take steps to avoid losing too much of your bank in one go.
Although I've few hard and fast rules, I don't risk more than 10% of the LM portfolio on any one trade. And it's only that high because my bank is not large enough to allow me to trade 2% at a time.
Whilst I have a limit of 10% risk on a trade what I will do is add another "unit" to a winning position once it shows sufficient paper profit.
You can see this in action in the below update for week ending 5th June 2020:
| Code | Sector | Date Bought | Cost | Value | Gain/Loss |
|---|---|---|---|---|---|
| LM009 LM009-2 |
Gas, Water & Multiutilities | 05/02/2019 04/02/2020 |
£2020 | £2030 | 0.18% |
| LM012 LM012-2 |
Real Estate Investment Trusts | 20/05/2019 28/11/2019 |
£2030 | £2400 | 17.91% |
| LM023 | ETF | 19/05/2020 | £1020 | £950 | (6.97%) |
| LM024 | ETC | 01/06/2020 | £1010 | £1110 | 9.78% |
For example LM009 - I bought £1,000 worth on 05/02/2019 and then added another "unit" of £1,000 worth almost a year later after the share price had increased. My first purchase was already in profit when I made a second purchase so I had some leeway, a "cushion", against large losses if the market reversed.
It's not foolproof but pyramiding in this way allows me to benefit more from shares that are gaining in value.
As time goes on and the LM bank grows the value of a unit will go up but as a percentage of the total bank it will never go above 10%.
My hope is that while this percentage is high, it will still protect me against complete ruin should some trades go south. For example if a global pandemic was to cause stock market chaos...
As unlikely as that is!
New position this week - LM024 - an ETC (Exchange Traded Commodity). Tight stop on this due to the criteria for choosing it (highest high/lowest low).
In short, if the price closes at the lowest low for the last 20 days I will close off the trade. It's a trade which is taken following the same rules that I used to catch quite a bit of that lovely Palladium run up in late 2019/early 2020. LM023 was purchased for the same reason.
Even though I'm keeping away from the stock market for now, there are still opportunities in commodities which I'm welcoming with open arms.