Investing or Speculating? Learn the difference when it comes to Commodities

Asset Allocation

Asset Allocation Model, every trader should have one.

We must make the point that all monies allocated toward investing or speculating (investing and speculating are not the same) should be ear marked as risk capital.

This of course means money that you can live without

A good rule of thumb is to take the number 100 subtract your age and the number left over is the percentage of capital you should have in growth.

Remember reducing debt is a form of increasing ones over all return on capital.

When reducing debt and accumulating wealth, having a plan is rule number one. This plan should be flexible enough to allow you to meet unexpected financial obligations, while still promoting solid fiscal habits (saving, investing, retirement, etc.).

This plan is often referred to as an Asset Allocation Model, and every trader should have one. The model that will be presented is quite conservative and provides for only moderate growth, but the general ideas are very applicable for all risk types. Although being completely debt free before trading would be the optimal goal, this is hardly the reality for most traders. So we must make the point that all monies allocated toward investing or speculating (investing and speculating are not the same) should be ear marked as risk capital. This of course means money that you can live without, and if lost will not change your lifestyle. This money should not be re-allocated from a more needy area of your model.

There are three places to file your monies.

	The first file is called cash, in this file you should place all monies that are immediately available. These would include checking accounts, savings accounts, C.D.'s, T-bills, etc. All capital that matures in less then one year or is otherwise right at your fingertips. This file under optimal conditions should have no more then six months to one year's worth of expense capital total. This avoids having too much money liquid and thus losing pace with inflation and taxes. Expense capital is commonly defined as money needed to fulfill monthly bills and regularly occurring cost. This obviously allows for a good cushion of cash in adverse times.
	The second file is called short term capital, and is for all monies with maturity of two to five years in length. This would include long term C.D.'s, bonds, R.E.I.T.'s, annuities, etc. This file is for all capital we do not foresee using in the next fiscal year, and would like to have out pace inflation and taxes while still being very safe. This second file is quite important for retired people, and for those on the cusp of retirement. This is where growth money moves back to as we age, and our risk tolerance diminishes.
	The third file is called growth, and all capital in here is primarily trying to grow and produce wealth. This is where all investments like stock, stock options, and commodities belong.

A good rule of thumb is to take the number 100 subtract your age and the number left over is the percentage of capital you should have in growth. Remember, there are many different risk factors for growth, trading coffee futures has different risk then purchasing G.M. stock certificates. This file can be even further defined.

By building a solid foundation through asset allocation, we can keep risk relative to growth, and avoid negative growth. Also, your primary residence is not really an investment in the truest sense. The primary goal for your residence is to provide a home to live in, not to go up in value. Do not place your home or home equity in the third file.

One of the most common errors for conservative people is to keep too much money in file one and two. Although safe, their money could be losing ground to inflation and taxes. For less conservative people, not satisfying file one is the most common error. Of course, your age and the amount of working years left are important factors when calculating one's risk tolerance. The primary guidance this should leave you with is to avoid leaping aggressively after any growth opportunity before other areas of your model have been addressed. Also remember, reducing debt is a form of increasing one's over all return on capital.

Hopefully, with these general guide lines in mind, your trading will fit with better comfort in your over-all portfolio. Because when we trade from a place of comfort, we make disciplined decisions, and success loves discipline. Good trading.

Robin Williams
Financial Consultant