The multiple benefits of diversification
By Philipp Pfitzenmaier, Trade With Precision
Many aspiring traders have only one objective – to become fulltime in the markets. And while there is nothing wrong with that goal, it might be worthwhile digging deeper and asking why.
A key reason for many people coming into the business is the most obvious – they want to be wealthy and trading seems like a way of getting to that goal faster. But let’s be clear, trading is not a shortcut. It takes effort, dedication and practice, just as with any other field of expertise.
The real power of trading comes from its scalability – our trading process is pretty much the same whether our trading account is US$10,000, US$100,000 or US$250,000. So the same amount of work can potentially result in much larger profits if we are trading out of a bigger account. This is a huge benefit when compared to other professions. You won’t find another job where the same amount of work can pay you 25 times what you were previously paid.
But let’s move away from money for a moment and focus on the concept of what it really means to be wealthy. For me, being wealthy is not about having extra cash to spend, but rather about the choices having a higher income can create. Few people want extra money for its own sake, but rather for what it enables them to do. Essentially, having more money creates different lifestyle options. It can allow a successful trader to adopt a more relaxed approach to almost everything as their focus can be shifted from surviving to actually living.
How to make it
So how can we become wealthy? At its heart the formula is quite simple: earn more money than you spend and become cash flow positive. For traders, the keys to achieving this goal are well-established. We need strong risk management, diversification and portfolios. Obviously, we can put all eggs in one basket, but this can be risky – if something goes wrong, your cash flow will quickly diminish. A better approach is to create a portfolio of potential cash flow generators to spread out the risk.
We can earn money in different ways. Working a steady job with a regular payday is obviously a good way to generate a consistent cash flow. Another option could be investing in real estate: if done correctly you have the potential to end up with some solid income generation down the road.
But the trading definitely has strong potential to generate cash flow. And remember, trading is a lifestyle choice. There is no need to be glued to your screen 8 hours-plus per day – it could be that you can achieve your daily goal in just part of your spare time. There is no need to abandon your normal day job until you feel able to. And anyway, in my view, having two or more cash flow generators is much better than just having one.
Having some nice cash flow generators in place is only half the battle. The key is still to spend less than you earn so that you stay cash flow positive.
Unfortunately, the consumer retail industry has done an exceptional job of luring you into spending more than necessary – buy now, pay later. We need to do our best to be intelligent consumers. In other words, only buy what we need, compare prices, and make good judgement calls. Do you really need the new shiny car coming directly from the factory, or is the three-year-old used one just as suitable for our needs? The difference could be around 40-50% saved in the course of the loan repayments. And you probably won’t notice any practical difference in the use you get out of the car.
And the money not wasted on a shiny new car could be used instead as the down payment, for example, on your next real estate deal. Yes, I’ve warned about taking on unnecessary debt. But we need to distinguish between consumer loans (new smartphones, cars, TVs, furniture, etc.) and loans taken for investments (real estate, investment in your company, etc.). Consumer loans should be avoided at all cost if you want to build long-term wealth.
Being truly wealthy means that ultimately your money will work for you, and not the other way round. Just close your eyes and imagine a situation a few years down the road when you will happily check the markets in the morning and then head to work knowing that your day job and perhaps your rental tenants have already taken care of this month’s expenses and your trading is just a bonus on top.
How does that sound compared to slaving away, trying to make ends meet and hoping that your boss is happy and that no downsizing program is around the corner? Trading is a great profession. But building up a portfolio of cash flow generators can be even more attractive. Personally, I’m an advocate of diversification for long-term wealth creation.
Please book in your calendar our next live webinars with Paul Harrison:
The Beginner’s Guide to Profitably Trading the Markets
Date: Wednesday, November 1st, 2017
Time: 8:00 pm London, 7:00 am Sydney Next day and 9:00 am Auckland Next day
The Critical Trading Errors and How to Avoid Them
Date: Tuesday, November 7th, 2017
Time: 7:00 pm Sydney, 9:00 pm Auckland and 8:00 am London