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Monday, November 2, 2009

Monday Challenge Project Summary: November 2, 2009

Previous Challenge Project Balances:

Investing Account Balance: $661.50
Stock / Futures Trading Balance: $1,546.21
Online Savings Balance: $150.30
Total Challenge Project Funds: $2,358.01

The original video explanation of the Challenge Project is to be found here.

Rule No. 2 of the Challenge Project states that each month, we can divvy up $100.00 as we wish between the various challenge project accounts. Some time ago I stated that I may split up Rule No. 2, into weekly segments; or, $25.00 a week.

For this week, the $25.00 weekly deposit is being transferred to the Challenge Project Trading Account.

Again, obviously this is to strengthen the balance on the Trading Account, and give us a little more equity to trade with.

So let's talk a little bit about this weeks decision.

Look across the capital increases that each of these accounts have enjoyed in 2009. The Investing Account is up about 35%. The Trading Account is up about 55%, after this weeks deposit. The Savings Account is up about 22%. Yes, that's all because of rule number two of the Challenge Project.

But as the accounts are so tiny, the accounts are at a a point where rule number two can add more in terms of a percentage to our accounts safely, than a trade or investment could, as participation in the markets at this point opens up unacceptable risk. That's precisely why we stated that while we are at the current stage of development for the Challenge Project, the main goal was to bump up the capital in the accounts; and not actively trade the accounts.

Think about it. We could add $100.00 in a one month period to an account, with zero risk, and the account could grow in size by 75%. Or we could look for a $180.00 gain, but stand to lose 50% of the accounts balance. Which is the better business decision? Obviously, to not trade, and take the increase in capital via rule number two.

As time goes on, rule no. two will represent a decreasing percentage increase to the accounts. If we add $25.00 to the Savings Account at the present time? That'd represent a 16% increase in the capital in the account. But if we add $25.00 to the Trading Account, then that only represents a 1 1/2% increase to the account.

This means that as time passes for each account? 1) Trading will become more and more active. It has to, otherwise, all we're doing is adding money, and rule number two will have less and less impact to the equity curve, and 2) It will become more important to feed the gains from more profitable accounts, to less profitable accounts.

Now I'm not saying that we're going to start actively trading the Trading account. $1,571.21 is still extremely small. Tiny. Heck, $3,500.00 is a small account. I'm simply trying to explain what you will see happen with these accounts as time passes, and what the strategy in the future is when it comes to the Challenge Project. The real trick, will be to continue trading returns and account growth of 50% and 35% per year.

Also, we have to consider that for the last month or so, we've concentrated on increasing the size of the Investing account. So if you look at the equity curve on the trading account? It has gone a little flat in recent months. So this weeks decision is really about "throwing a bone" to the trading account.

Here are the new balances for each of the Challenge Project, after this weeks deposit ...

Challenge Project Balances After Rule No. 2 Deposit:

Investing Account Balance: $655.58
(YTD cash and equity up about 35% Return is about -3%)
  • 4.1377 shares of KO (DRIP on)
  • 3.0546 shares of JNJ (DRIP on)
  • 2 shares of MCD (DRIP on)
  • Cash: $137.41
-$60.00 of this cash I reserve to D.C.A. KO
-$60.00 of this cash I reserve to D.C.A. JNJ
-$80.00 of this cash I reserve to D.C.A. MCD
-This leaves a -$62.59 shortfall for D.C.A. cash
  • Additional $37.53 available from slush fund
Investing Account Balance Since Inception
(Can be Enlarged):

Stock / Futures Trading Balance: $1,571.21
(YTD cash equity up about 55.0%. Return on Capital is about 2%)
  • 3% risk tolerance gives us $47.13 to risk per trade
  • Additional $37.53 available from slush fund
Trading Account Balance Since Inception:
(Can Be Enlarged)

Savings Balance: $150.30
(YTD cash equity up about 22.3%. Return on Capital is about 1.49%)
  • $37.53 for a Slush fund / Drawdown Kill Switch fund
  • $75.24 for a Base Savings
  • $37.53 for Emergency Savings
Savings Account Balance Since Inception:
(Can Be Enlarged)
We'll be back to the Challenge Project, next Monday.

* * *

Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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