Friday, December 13, 2013

Sticking To Your Plan - Analyzing Risk and Reward

Recently, an opportunity to take a position in 3D Systems came through for the fund. As written here before,  3D Systems looks to be on track past 80 and KDK Fund is not sure how far it could go in 2014. But the opportunity came with an added risk of needing capital that is currently assigned elsewhere in 2014. This was a big test for the fund. Take the risk for large gain or stick to your plan and gain less. The difference maker for this decision was the percentage amount the risk carried over the percentage gain difference that trading 3D Systems over other investments would have brought.

When this analysis occurred, it was made plain and clear that the trade in 3D Systems would have to wait just a little while longer. The potential loss would have been too great a burden on another part of the 2014 investing plan to warrant such a trade. This doesn't mean the trade will not happen in 2014. It most probably will happen. Just further down the road.

It is one of the fund's beliefs that the value of good analysis sometimes comes from knowing what not to invest in or trade. But it is not easy to follow. The thought of large gains can have a big emotional effect on how investment and trading plans are made. It can even effect your psychological status about the trading plan. But they can also damage investment and trading plans that do not do the proper analysis on both possible gains and losses. When a large opportunity comes up, the fund will first do a time analysis of the trade. Stepping away from the trade button in order to analyze the trade fully can save your portfolio from destruction, which is far more important than gaining an extra percentage on the gain side.

Do you have any experience with this topic? Please share as this blog is looking to be a tool in developing a stronger investing and trading community.

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