Extreme Measures

Determine Your Investment Potential

To succeed at extreme investing, you must have a burning desire to master the rules and strategies of the game. This is essential if you want to develop a trading system or skill set that will work for you in the pursuit of extreme investing. Extreme investing demands significant discipline-which means you must possess Zen-like control while trading and adhere to strict risk-management techniques. But the first step is to determine whether your financial situation allows for this extreme adventure.

To be an extreme investor, you need extra capital-money you can live without comfortably, both in terms of continuing lifestyle and peace of mind. This strictly excludes retirement money or the kids' college funds! Many investors start with money that's simply idle, not already earmarked for a specific purpose. Some investors divide their existing stock account into two separate accounts: one for long-term investing, the other for playing options and day trading.

The point is that money used for extreme investing must be extra money, not money you need to live on, and not money you are diverting from other vital accounts. If you have the slightest doubt about whether your financial status will allow for any extreme activity, you need to produce an overall financial plan-a snapshot, if you will, of your financial status-for you and your family:

  • Look at your net worth. Take into consideration how long it took you to get where you are and how far you are from achieving your retirement goals. What must your net worth be for you to feel secure in retirement? What's the difference between your net worth and the cost of your future plans?
  • Consider your current income and expense picture. If you pursue extreme investing at any level, will your current income source be affected?
  • If you have extra money, should that money be safely invested for future expenses that you've identified in your financial plan? If you have extra capital but pending expenses, don't risk that capital on extreme investing.

If you still have doubts about whether you have the extra cash to go to the extreme, talk to a financial consultant. He or she will take a look at your net worth, your plans for the future and other variables, and help you figure out what's left to play with at the end of the day.

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This article was originally published in the November 2000 print edition of Entrepreneur with the headline: Extreme Measures.

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