Don’t invest what you can afford to lose!

With a new year upon us, now is the time that you might be thinking of beginning your spread betting journey, or maybe the time when you’re thinking about topping up your spread betting account with the cash you were given for Christmas.

How much to deposit in your account is a tricky question, because bigger bets mean bigger gains… and bigger losses!

How much can you afford to lose?

There is an old saying that you should “only invest (or speculate) with money you can afford to lose”.

It’s good advice when taken to mean only speculating with funds left over once you have paid the mortgage and other bills. It’s not such good advice when taken too literally by high earners, because… if you think you can afford to lose a lot of money, you probably will.  I know this from past experience, or rather from past inexperience.

When I first started speculating in the markets I was “cash rich” (from my day job) and “time poor”. Not only did I not have time to monitor my positions — because of that pesky day job — but I also did not have time to properly test my theories, learn from my mistakes, and develop a trading plan. But it didn’t matter, because as my losses mounted I simply had to feed in more cash. I thought I could afford to lose a lot of money, so that’s exactly what I did!

Only when I quit the rate race to trade, write and publish full-time did I learn to control my risk and manage my money so as to minimise the money I lost en route to making money. This alone will not guarantee success, but it’s a better way of “buying time” while you discover the trading “Holy Grail” than buying time by throwing more and more good money after bad.

Don’t Lose Money!

Taken to its logical conclusion, the amount of money that you can afford to lose is NONE! But this is a little impractical. In my Trading Trail account I’m willing to lose no more than £1000 in total, and to lose it very slowly, while waiting for my bombed-out contrarian stocks to turn around decisively and multi-bag my money.

You don’t need to Bet Big to Win Big

Minimising your losses by (among other things) placing very small £1-per-point spread bets, or even smaller fractional bets, might seem pathetic. But thanks to the leveraged nature of spread betting, and the potential to pyramid your profits into bigger stakes, you really don’t need to bet big in order to win big. I proved it in 2009 by turning a very modest £600 into £18,000 within six months by spread betting. I know it’s not the millions you were hoping for, but you’d be happy enough making £18,000 as a 10% return within six months on a £180,000 “investment”. And whereas the traditional investor stood to lose £180,000 by making ill-judged stock purchases, I stood to lose only the original £600.

If you think you need to have money in order to make money, you can think again. If you have a lot of money currently burning a hole in your pocket, my advice would be to spread bet a little of it and “invest” the rest in the safest bank deposit account you can find.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.