"Behold the turtle. He makes progress only when he sticks his neck out." -- James Bryant Conant
Before you buy a stock or put money into an MLM company or money-making program, you should consider the risk. Generally, the risk is that you could lose some or all of your money. See Money Skill #2A.
When I joined SG, after several hours of analysis, I decided to risk $6,000. That's how much I was willing to lose if my decision was a mistake. As soon as convenient (after about three months), I took out $6,000 to get to the "can't-lose" position. I want the "risk-window" to be as short as possible. During the three-month risk-window my $6,000 capital was at risk. I could have lost all of it.
There are six general approaches to minimizing this kind of risk:
(a) Utilize programs where you don't have to commit any of your own money -- Money Skill #26. (b) Suppose you're "playing" with $10,000 in "high-risk capital." The maximum you put into any one program is $1,000 -- or maybe $2,000 if you're very confident about the program. (c) Diversification -- you spread your capital over 10 - 20 different programs -- Money Skill #25. (d) You take out your original capital (maybe plus a modest profit) as soon as convenient. Thereafter you play with the "house's money." (In the case of stocks, when your stock's price has doubled you could sell half to recover your original capital.) (e) With programs that pay referral fees you may be able to quickly earn more in referral fees than your original capital. (f) You make an assessment of the maximum amount of money you think you'll be able to take out of a program per month. WQNS has a "buy back" index on their price page. They also have a publicly viewable e-gold account which you can access from their FAQ page. As a general rule of thumb, you should probably put no more money into a program than the amount you expect to be able to take out per month, after 2 - 3 months. (I put in $5,350 into WQNS, figuring that within two months or so I would be able to take out around $5,000 per month.) WQNS also has their "latest news" on their website. There are forums for most programs. From all the available information, you can make an assessment of the maximum you should risk on any one program.
A great deal can be learned about risk and money management >>>from professional gamblers, particularly blackjack players -- see BJ21.com: Winning at Casino Gambling. For example, a blackjack player with a bankroll of $10,000 might visit a casino with one-tenth: $1,000. If he loses that, reducing his bankroll to $9,000, on his next visit he risks $900. On any casino visit he risks one-tenth of his bankroll. (His basic betting unit might be $10, dropping to $5 when the "count" is negative and going up to a $100 bet, depending on how positive the "count" and what range of bet size it takes to "alarm" casino personnel.)
"Gambler's ruin" is a very important concept. In a game like blackjack, even where the professional has a statistical advantage over the casino of around 1%, he can still lose all his money, because of wild fluctuations that include massive "losing streaks," if his bet size is too large for his bankroll. Similarly, in the stock market or with money-making programs, people can lose all their money if their individual "bets" are too large compared to their bankrolls. See "Gambler's Ruin" Calculator for Video Poker. (Jeff Lotspiech's Video Poker Page is a good example of how professional gamblers manage to enjoy a statistical advantage over casinos.)
This Basic Money Skills article is oriented toward people starting with nothing or limited capital of a few hundred to a few thousand dollars. If you apply these money skills, the day will come when your capital has grown to $100,000 or more. At some point you may want to split your capital into separate bankrolls. You could have one bankroll for high-risk speculation such as money-making programs, stock options, futures contracts, etc. You could have a second bankroll for medium-risk speculation such as high-tech stocks. And you could have a third bankroll for safe long-term investments such as Swiss annuities, government bonds, etc. More on this in Advanced Money Skills.
The Risk Meter may assist you with managing risk related to the programs it features.
Another important consideration in risk management is "potential downside" versus "potential upside." As I write this (4/29/2000), American Millennium Corp. is priced at $1.00. I could buy it with a stop-loss at maybe 74c. Allowing for "slippage," I risk about 30% of my money. (Of course, there could be circumstances that result in the price dropping to 1c before a buyer can be found, or the stock could be delisted, in which case I effectively lose all my money. These are unlikely possibilities, but I don't ignore them.) Now, if I put $10,000 into AMCI, with a $3,000 risk, and I think that AMCI has an upside potential of $20, it would be a good bet. On the downside, I could lose $3,000. On the upside, I could win $190,000!
In some money-making programs, particularly if you can build a substantial downline, you can achieve a huge "upside vs. downside ratio." For example, if you pay $100 to join a program and you're in a position to recruit 20 people, earning you $1,000 (depends on the nature of the compensation plan), then you effectively have a 10/1 "upside vs. downside ratio." These are very good odds!
