Our lives are filled with risk, from the moment we roll out of bed or rise from our futon to the moment we crawl back in, risk is our faithful companion. Every thought can trigger risk. Every act can be risky. Every result, happy or sad, is a balance between risk and reward.
Hence, the motto at the top of my site:
Risk is good, as long as you know the odds.
A far better motto, we’ve got to admit, than that of Shelley’s poor old Ozymandias.*
Most of my friends shudder at the thought of risk. The only risk/reward ratio they’re willing to accept is 0:1. And their money management reflects that aversion. If they trade stocks at all, they put their money in top-name ETFs, SPY or QQQ or for a walk on the wide, IWM. If they really hate risk, they put their spare money in CDs. And they let them sit, never changing a thing, through the highs of exuberance to the lows of depression. Or if they are wealthy enough, they hand their funds over to a manager, and let him or her deal with the risk, on the theory that what we don’t know can’t worry us.
I am a retired Associated Press journalist who has been trading since 1982. I’m speculating with my own funds only, and trust me, having spent my life in the low-paid world of journalism, I don’t have a huge account.
After retiring from AP, I immediately returned to the Mother Ship, sort of, as a contract worker setting up the AP’s coverage for the election night vote count in several states. It was a good gig, paid well, until the Great Recession came. AP cut back, and I was left with challenge of living on retiree income.
It was at that point that I learned that risk-taking isn’t only fun times for the young, but a financial necessity for the old. During the recession, interest rates were as close to zero as I had seen in a lifetime. The safe places — bank accounts, CDs, Treasury bills — were invitations for that great value-munching demon Inflation to come and feast. I spend several months, thinking it through. After all, I was the son of a man who, before his passing, had put all of his savings in 13-week Treasury bills. I’ve never been risk averse, but the stakes had become higher with retirement, I was closer to the edge, I was sharply aware of the example of my Father, and I felt acutely that I had to get it right.
The answer, I found, rested in the lap of the Mother of Profit: Risk. If no-risk trades won’t pay enough to overcome inflation, then higher risk trades will. Risk, I decided, was my best friend when it comes to money management, as long I set the risk at levels that would properly meet my needs. For that I had to know the odds, or at least be able to come up with a good estimate, even if it’s high, low, none or somewhere in between levels.
With that necessity in mind, I divide my resources into four levels of risk:
- No risk. For that, like Dad, I use the 13-week Treasury bills. No rules except that I divide my bill purchases into 13 parts, one coming to maturity and being reinvested each week.
- Low risk. At this point I’m using income-producing bond funds and REITs. No rules for this one. I’m monitoring it with a 50-day/200-day moving average crossover, but the trading decisions are based on gut feel.
- Mid-risk. I’m running this as stock investments with five slots in a no-fee brokerage, using a trading signal for getting in and out. Trades last for weeks, generally, and aren’t leveraged. The mid-risk operation has a set of rules, strictly followed
- High risk. These are options contracts, leveraged, and almost always structured as short iron condors. This level also has a set of rules, strictly followed
Private Trader is my realtime trading diary dedicated to primarily to shorter-term options trades, the high-risk positions, using a volatility strategy, with occasional reference to my mid-risk trades. See the Trading Rules section of Private Trader for a detailed description of my high-risk and mid-risk strategies.
Aside from “Risk is good”, there’s another motto that guides my trading: “Manage. Manage. And after that, Manage some more.” I’m not a buy and hold trader. I keep a close eye on all of my money, from high risk positions down to the low and the quarters in my pocket. After all, it’s my money, and no one will take better care of it that me.
* Ozymandias: Title of a poem about risk, by Percy Bysshe Shelley. The mighty Ozymandias clearly miscalculated his long-term odds. The poem goes like this:
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.