A framework to determine if trading securities for your own account is right for you

Investment Matrix- What's Right for You!

Each Category is rated from 1 to 10. 1 is a little to none while 10 is a large amount, say, of time, or long term time horizon or amount you can afford to lose without jeopardizing your lifestyle and retirement. If you score 60 to 70, you might be able to tolerate day trading from a financial and emotional perspective, but you still should never commit more than 40% of your liquid net worth to this roller coaster. If you rate less than 60, but more than 50, you might trade an even lower portion of your liquid net worth. Scores of less than 50 and you should not day trade.

The lower your score, the more important it is to proceed safely and comfortably. If you have the money to lose, but not the time, business experience, or investment experience, better to dollar cost average in quality mutual funds.  You must have the time, the money, the tolerance, the technique, the ability to take losses, and the experience to be successful. Mix a good value, a good growth with some small capitalization exposure, and put 10% in a good international fund and say 5% to an emerging market fund.

You can profile yourself pretty quickly and see where you stand. The safest course is dollar cost averaging (putting the money in the market as you have it) and diversifying through mutual funds and letting the money accumulate.

The least safe approach is day trading. The less you know, the less you have to lose, the worse your experience will be. Don't get your thrills exposing hard earned money to losses for the thrill of it. Find a sport that turns you on and satisfies your animal urges.

If you want to invest, look at companies that are by-products of rigorous analysis by you or your trusted financial advisors, who have earned your faith over a period of time with consistent performance, with disruptions consistent with your risk threshold.   Finding companies that are thematically correct, technically attractive, and which have exhibited superior growth with continuing momentum, but are nevertheless affordable is a wonderful way to combine investing styles to unearth the true long term buy and holds. Be rigorous and demanding. Make your investment candidates pass as many tests as possible to get into your portfolio. 

If you want to buy individual securities, but scored low on your self-evaluation, make sure you stay diversified. One stock should not exceed 5% of your portfolio. Further, you should beware of industry or sector concentration. In other words, no matter how seemingly attractive a sector might be at a particular point in time, you should insure that no one industry is too overweighting vs its market weighting. For instance, internet stocks should represent more than 15% of your portfolio, no matter how convinced you are it will succeed.  While attractive at one point in time, BioTecs, Restaurants, sectors in technology, and, yes, even the Internet (many cut in half) serve to vividly illustrate the risks of concentration. Concentrated portfolios can outperform only to really underperform later.

Look at ChartWinners.com for ideas you should consider if you want to select individual securities. Try trading a paper portfolio and see how you perform and how you feel. While a simulated exercise, you should make the experience as real as possible and keep detailed records. Make sure you have a strong reason to buy, sell, hold, or short. Good luck.