I want to support what Rato said here.
"It's even scarier to think that people used such poor risk management. The rules are there for a reason. No more than 20% in a single asset or correlated asset class. Diversify. If you want to speculate, do a little CGS, but then combine that with a little US blue chip, a little emerging market index fund, a little MLP, a little cash, some US small caps, maybe some high yield corporates, some utilities--that's a reasonable and responsible way to invest money."
Seriously, risk management is the key here. My approach is different than Rato's, I don't believe in diversification across several asset classes, but I do strongly believe in my "feeling comfortable" strategy combined with strict discipline regarding position size and original investment thesis.
It depends on how much time you can invest if you want to trade or invest in "CGS" here. All the speculative, high volatility, or momentum driven sectors require both an extremely high time input and also a much stricter discipline than index funds or U.S. blue chips. Sectors like emerging market small caps, junior miners or biotech, also any type of derivatives.
I use the following strategy and it works great for me.
1. Use a strict limit for position size (position in a single stock relative to your total portfolio size). I use 5% for full position, 2.5% for 1/2 position and roughly 1% for a starter. If you go higher than 5% - if you added trading shares to a full position for a reason different from your original investment thesis (news, earnings, price action), you need to sell the extra shares very soon. Talking hours or days here, not weeks.
The position size also depends on liquidity of your stock. For most OTC quoted names it is not advised to take a full position, in theory you should be able to liquidate all your positions quickly at any time.
2. Have an investment thesis. When you buy a stock you buy it for a reason. Can be anything, from upcoming catalyst to P/E ratio, price action, volume, chart, macro economics or politics, events etc. - you always have a reason to go long in a stock. Remember that this is your investment thesis - don't try to come up with a new one if the stock doesn't behave accordingly.
3. Don't be afraid to realize losses if a stock trends to your opposite direction. Chances are not on your side if you trade against the market, it might work but it is an unnecessary risk. Have a clear idea where you would sell on both sides of the scale. Same goes for taking profits. Nobody ever got hurt by taking profits too early. The best traders are those with seemingly immaculate timing for entries and exits, in the end a lot of it will be just pure luck.
China small caps are - unrelated to the current crisis - a high risk investment (and possibly high return). Even short term traders can lose a fortune within hours when lightning strikes again. Nothing is ever safe, even with the best due diligence and highest level of skepticism we can get caught on the wrong side of a trade. I don't want to sound disrespectful but a tsunami needs just 30 minutes to wash away everything - you could just be in the bathroom, and when back nothing is like it was before.
That's why risk management was, is and will always be the key here.
AI
