Your personal finance development should be a simple, yet natural, progression. I started by participating in a stock plan at work. Next I started investing in mutual funds through my 401K. I began to learn how to diversify my portfolio and spread the opportunities and the risks around. I started looking for investments that have a high correlation with each other and started to invest based on trends. In my thirties, my portfolio performance began to improve little by little. I started reading. It was time to take the next step in my personal finance plan; leveraging.
One of the first derivations that I took in my personal finance growth was to begin to short stock – actually expecting the stock to do poorly, lose value, and then purchase the stock at a discounted price while making money during the fall. The next step in the progression was to really start to leverage my investments by learning about trading on margin.
After accumulating some stocks in my portfolio, additional shares were purchased using margin processes defined by my broker – essentially buying additional shares backed only by existing securities – no cash up front as in the past. This sounds like a wonderful thing, and it can be, but it can also be very risky.
I remember to this day the date October 20, 1987, I was 34 years old with a young family with two boys, busy going to work, and just starting back to college at nights. It was about 7:15 in the morning, when getting out of the shower before going to work, the phone rang. It was my broker. I needed to come up with $1,800 in a very short period of time to cover a “margin call” or I would lose my investment altogether. See what I’m not telling you is that the market on October 19, 1987 saw one of the largest percentage drops in the Dow in the history of the Dow – losing 22.6 percent in one day.
Fortunately we had enough liquidity at the time to be able to not only cover the margin call, but to invest more in the stock that had dropped so significantly the day before. This was one time in which I played the market very well, as the stock in question had a significant rebound only days later as the market re-adjusted. I wound up making out quite handsomely – this time! The lesson is understanding the risks associated with trading on margin; it can easily come back to haunt you if you are not prepared.
A series of increasingly complex personal finance moves were not too far in the future for me. The next steps would lead me to trade using options and futures while learning to hedge investments using these types of tools. It is all about learning to manage and spread risk. There are many roads open to you for investing in your future and your retirement. Getting the right roadmap, and learning how to read it, is key to your personal finance growth.