I have shared before that it is OK to gamble a bit once in a while.
I am Chinese and gambling is in my blood.
It's not my fault that I am born Chinese.
So, I have nothing against speculation per se.
1. As long as speculators know that what they are doing is speculation,
2. As long as they are mindful of the possible consequences
and
3. As long as they are able to take the losses comfortably if things go wrong, there is nothing really wrong with speculation, is there?
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Well, I would say please keep speculative positions small.
Of course, how small it is would depend on
1. our risk appetite
and
2. our ability absorb losses.
2 to 3% of our portfolio size for some and 10% for others?
Sounds rather arbitrary, doesn't it?
When a reader asked me for a "formula" to help quantify "small", what did I say?
I told him it would have to be an amount I can recover quickly within a year or less in case of a total loss.
This measure has always given me peace of mind and he said it is helpful to him.
So, I thought I should share this.
Of course, if I should have more than one speculative position, the total exposure should not exceed the amount I think I could recover within a year.
It is a bit like having one or five credit cards from the same bank.
The credit limit doesn't increase with each additional card issued.
Like with so many things in my life now, it is about avoiding stressful situations where possible and not losing more money than I can recoup in a relatively short time works for me.
Always ask "to what extent can I afford to be completely wrong?"
Once we have the answer to this question, we will know how to size our more speculative positions.
Related posts:
1. Motivations and methods in investing.
2. How to make recovery from losses easier?
3. To be richer, be comfortable with being invested.