What is Risk Capital?

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Personally, I believe investing should be as fun as watching paint dry. I took some time a while back to evaluate my investing strategy and decided that it took took much of my time and unnecessarily increased my risk. As a result, I switched my strategy to dividend investing and have been initiating position with an exit point much, much further in the future than I was previously use to.

I did want to clear one thing up though. Even though I consider myself a dividend growth investor, that individual strategy does not constitute my entire portfolio. Diversification is key for successful portfolio management. Dividend stocks do comprise a majority of my investments, but I do have other positions that were initiated under a different strategy and set of trading rules.
For example, my OptionsHouse account contains my risk capital. In essence, risk capital are funds allocated to speculative activity that is high-risk but high-reward. My risk capital account is much, much smaller than my dividend and tax sheltered accounts, but it does allow me to have a little “fun” with investing. With these funds you can take on riskier investments and use it as a testing ground to learn the nuances of a high risk strategy before beginning to implement it with a larger percentage of your portfolio.

My Top Level Portfolio Breakdown

As of right now, this is a rough breakdown of my entire portfolio
10% – Cash
20% – Risk Capital
40% – Dividend Growth
30% – Mutual Funds
This is the top layer of diversification. If we were to dig into each of those groups, you would see further diversification by sector and instrument (stock, short, options, etc). But that’s a topic for another blog post.

How Much Risk Capital Should I Allocate?

So what’s a good percentage to allocate to your risk capital funds? Well, no one can answer that question for you. It all depends on your personal preference and what you hope to achieve. Young investors should always allocate a slightly higher percentage of their savings to risk capital than older investors. When your young you have more lessons to learn and more time to recover from any losses you incur. Taking on higher risk investments are less costly if you have an extra 20 years to make up those loses. But, even at a young age risk capital can be dangerous if you don’t understand how to manage your risk. Just because you are investing money that has a higher potential to lose money doesn’t mean you want to lose money. It doesn’t matter if you’re young f you don’t understand risk management and have the ability to make +EV decisions.

At the end of the day, the risk capital all boils down to personal preference. If you don’t have the time to study your positions and handle the associated stress, there is no point in allocating risk capital. A higher gain doesn’t necessarily mean a better investment if it adversely effects other aspects of your life. Take time to evaluate your personal preferences and put aside a comfortable amount of play around with options and high growth technology or pharmaceutical stocks. Even if you don’t end up making money right off the bat, at least you’ll learn how to handle different situations and become a better investor as a result.







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