What is the appropriate amount of investment for an investor who is new to equity investment? Of course it depends on who invests. If you are an aggressive investor, you will be willing to pay big money for it, and if you are a prudent investor, you will invest a small amount of money.
Many novice investors tend to continue to raise their investment. Unfortunately, there is little or no return on investment, and only investment increases.
Most of the novice investors’ investments are used to cover investment losses. Investments continue to grow, but they do not increase investment leverage.
If you look at this phenomenon a little closer, you can see that the return after the first purchase of stocks is declining steadily. So, novice investors keep putting money into stock accounts to make up for any losses. But stocks do not climb, and eventually they spend months or even years looking at the loss.
There is not a reasonable amount of investment for everyone. However, there is a need to define the appropriate amount of investment that meets your own criteria.
For most novice investors, the expected return is 20% to 30%. We will calculate this by substituting the expected rate of return. If the target return rate is 20% and the 20% profit is 100 dollars, the initial investment amount will be 500 dollars.
- 500 X 20% = 100
But the stock market is not that easy. In fact, it is a sweet imagination that a novice investor invests 500 dollars and earns 100 dollars. Actual investment situation may be -50% instead of 20%. Setting up your initial investment with your target return is a very risky approach.
Investment set assuming -50% loss situation
What if you set up your investment assuming a loss of -50% from the beginning?
If you think you can take a loss of about 50 dollars, you will set a 100% investment for that 50 dollars. In this case, your initial investment can be set at $100.
- 50 + (50 X 100%) = 100
In the worst case, you can see a loss of -50%, but you can assume that the initial investment is reasonable because the loss you have to cover is initially 50 dollars.
On the contrary, if you are earning income rather than loss, it is also important to increase your investment. In this case, it is also recommended to increase it against the initial investment.
If you have a target return of 20% and you have achieved this rate, you can increase your investment by not exceeding 50% of the initial investment plus the proceeds.
- Total amount of holdings: 100 + (100 X 20%) = 120
- Investment to be added: Total amount of holdings X 50% = 60
- Total Investment: Total amount of holdings + Investment to be added
In other words, even if you increase your investment, you have to looking for the maximum loss you can afford.
Set up investment against total surplus funds
Another investment method is to set the investment amount to about 30% of the available funds.
Why 30%? It is a foolish thing to invest all of your money in a stock account. If you are working hard and using hard-earned money for investments, the realities you have to pay for when you have lost all that money may be too harsh.
Nevertheless, if you have to make an investment, it is safer to set your initial investment to less than 30% of your available funds.
If you have 1,000 dollars of available money, you will invest 300 dollars. If you fail to invest and lose 50% of your investment, the actual loss is about 150 dollars.
What if you compare with the total amount? It can be handled with a loss of only about 15%. When you lose 50% of the total amount, you have to suffer a painful and tough situation that will cause you to fall psychologically. But about 15% is a loss that anyone can withstand. And what is important is that 15% of losses are recoverable enough.
Anyway, more important than stock investment is your life to live. It may be wiser to increase the amount of investment and enjoy the joy of success rather than losing everything you have with an excess of greed.