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In Money, How Much Is Enough?

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When there's more to be earned, there's more to be lost.

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I discuss the importance of risk management so frequently that I'm sure some readers are tired of hearing about it. On the other hand, I get plenty of emails thanking me for spending so much time on the topic.

When I write about risk, I'm looking at it from the point of view of taking care of a current position or portfolio. The goal is to be as certain as you can be that no significant loss occurs, and that your long-term survival as an investor or trader isn't threatened.

Larry Swerdlow, writing for CBS's (CBS) Money Watch, pointed out the obvious in a post on the importance of risk management. It's something that I think is worth discussing: Swerdlow asked how you know when you have enough. A fair question.

How do you decide that earning additional money would play no significant role in your ability to live the life you want to live, and that losing some portion of your current net worth would play a negative role in your life?

If you've reached that point, why continue to play the game?


See Professor Wolfinger's Trading Philosophy for more

Please keep this idea in mind throughout your trading career. I know that successful people -- not necessary only traders -- continue to believe that there's more money to be earned, and there probably is. Winners tend to remain winners.

But the truth is that any investment can turn sour. Any successful person can have a cold streak. I'm not suggesting you do nothing but play golf and ignore the world, but I am suggesting that you scale back if you approach that "wealthy enough" level -- and be certain not to jeopardize your financial stability.

This hits home for me. After a spectacular year in 1981, I lost almost all of it in 1982 when I stubbornly refused to believe that the bear market had ended. I have no idea how or why I allowed that to happen.
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No positions in stocks mentioned.

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