In this post, I’m going to share with you how much of your portfolio should you dedicate towards trading penny stocks or speculative trades.
A lot of people get into trading penny stocks, or they want to be speculative, or they want a day trade. There’s nothing wrong with that if you know why you’re doing it, how much money to allocate there, and what’s going on in the business.
Penny Stock Courses
We have great courses if you’re interested in penny stocks.
When you’re getting into penny stocks, you have to understand what’s happening underneath the surface.
Understand that these trades are typically speculative trades.
Take a Look at Trading Portfolio
When you look at your total portfolio, and you look at your overall investments, you have to realize that there is your total portfolio allocated with your cash the right way.
It’s about knowing what’s going on and what’s happening with your money.
Here’s what many people do when they look at their total portfolio in their trading account. Let’s say you have $50,000.
This is what they do with their portfolio.
They trade 100% of that.
When in reality, it should only be (when we’re looking at penny stocks) a smaller part. I’ve redrawn this in a triangle. I think it’s a little bit easier to see. But a lot of people trade their penny stocks, and they trade it like their full portfolio.
They think they are going to trade their whole portfolio. But that’s not the right approach.
Pro Tip: You want stability in your personal life. Zoom out of it and think of it as a big picture in your life. You have to have some longer-term investments.
Long-term & Medium-term Investments
This could be basic dividend stocks. It could be long-term holds. You could mix it match with real estate if you like real estate.
You’re mixing and matching your total investments if you’re looking at your stock trading account, its dividend, stocks like maybe a Microsoft. Maybe a McDonald’s – anything that pays a good dividend for the long haul.
You’re not touching it. And if you have a $50,000 portfolio, 40%-60% is here in long-term investments. That would be about $25,000.
Then you have medium-term investments or trades. This could be option trades that are 30,40 days out or up to 60, 90, or 180 days out. But here this could be about 25% of your investments.
These are like swing trades, shorter-term trades, but not super long term investments that you’re holding for a very long period.
You’re holding these, but they’re not super short, but they’re not super long either. This could be maybe another $15,000 or so of your $50,000 fund.
Again 20%-25% – it just depends on how much money you want to allocate towards longer-term versus medium-term.
It’s time for Speculative Trading
The next step (because now we have about $10,000 left) is maybe the speculative trades. This is where the penny stocks fall in.
In this area is where you’re trading.
How much cash should you allocate?
Well, we have $25,000 in long-term investments. That’s half. That’s 50% of our money.
We have $15,000 over here in medium-term investments. And then our smallest chunk – we have about $10,000 left from our $50,000.
You might use $7,000 to $8,000 in the Penny Stocks. Remember, you hold a few thousand dollars back. Maybe a little bit of cash here in reserve – let’s say about $2,000.
But ultimately, you’re trading with about $7,000-$8,000 in your speculative trades. And if you break that down, it’s a smaller part, but this gives you a nice solid base and foundation. There’s nothing wrong with trading more in penny stocks if you have a larger portfolio. If this was $100,000, then you could double pretty much all these things up.
However, if you’re trading with the smaller account, don’t trade percentage-wise much more into penny stocks. If you do so, you could get burned, and now you got a whole portfolio at risk in higher risk speculative trades.
And you might be seeing a lot of these things on YouTube where someone made $500 today, made $700 made $2,200. Yeah, that’s great when it comes to trading penny stocks because, in these trades, you might expect a 30% or 60% return on investment. It could be a 150% return on investment. But sometimes you might be down 30% as well or 80% on those trades.
In these trades (medium-term) you might expect an 8%-10% return on investment on a per month basis. Maybe it could be like a 25% annual return on investment. And on these trades (long-term), you’re only looking maybe at 8% a year return on investment.
They have a different amount of returns. And because this one is more speculative, you might get some larger returns. But you also may get some larger drawdowns.
If you look at this (top area in a triangle) and we split this off into its kind of triangle, this is what you get.
You could do the same concept with this and break it apart into three levels. In this case, I could day trade some. I could swing trade some penny stocks here.
And then some I might hold for long term investments.
That’s another way to look at it as well. Out of $7,000-$8,000 maybe $2,000 0r $3,000 is in long term area.
Then you get $2,000 in the swing trading area and then $1,000 in the day trading area. Now you’ve got another baseline breakdown if you want to take it that much further and zoom it in into the finer more specific range.
Most Common Mistakes Traders Make
When you look at the big picture of how much of your portfolio you should dedicate towards penny stocks, you need to understand the bigger picture of your total portfolio. And that’s what most people don’t get. Most people trade 100% of their money. If they have $50,000, they’re trading $46,000, and that’s just too much.
It just doesn’t make sense. I don’t want you to make that mistake because it can burn you. And it can create a lot of trouble in your account. You can get stuck into positions, and you can burn your account and be very careful.
That’s what we’ve done with these courses. This will help you set up and understand how to trade these speculative trades and how to trade the penny stocks the right way.
If you’re serious and interested in planning your exit and entries, some trade ideas, learning about technical analysis, check these courses out.