The original Sharpe Income post can be found here.
The Sharpe Income category be found by clicking on that red ‘Sharpe Income’ tag next to this post title, or by clicking here.
We continue the discussion from the last entry.
This is something we recently mentioned in one of our recent “How to Begin” entries.
That is, the idea of regular capital additions. For new folks, this concept is vitally important to grasp.
And yes … we know we have discussed this concept a few times. We talked about it recently in the “How to Begin” entry, mentioned above. We have written on this concept in previous Sharpe Income entries. We have mentioned it in podcasts.
Yet time and time again, we find that new investors seem to shy away from this concept … believing that to add capital to one’s account on a regular basis is ‘cheating’. Or perhaps new investors underestimate the importance of adding capital to an account.
Let’s take that first false notion. The idea being that it is somehow ‘cheating’.
Listen … in the professional sphere, let me tell you … firms and institutions are interested in adding capital from outside sources. Or what about every 401k in the United States? They are powerful because of the capital contributions, made by the employee, the employer, or both. So why would any new trader try to behave in a way that professional firms do not? Why should any new investor shy away, thinking perhaps that to add capital is a way of ‘cheating’?
That simply does not make any sense.
Perhaps they mistakenly believe that we count capital added into the account as part of the performance of the account.
But we can’t. No one does this, unless they are cheating on their performance reporting. You will note in the Sharpe Income spreadsheet, and the PDF, that we do not count the capital added to the account, as part of the performance of the account.
So how exactly is adding capital ‘cheating’ again?
Now let’s explore the second problem, in that we see new investors under-estimating the importance of capital additions.
As we mentioned in a previous Sharpe Income entry, capital contributions provide you with an incredible amount of maneuverability. But perhaps to underscore the concept, let’s have an example, or illustration.
In example A – Let’s say you have $1,500.00, that you decide to invest. So you invest $700.00 in an income stock, and $800.00 in some sort of bond exposed instrument. Both pay you a dividend.
In example B – Let’s say you again, have $1,500 that you decide to invest. However, you also add $50.00 every week to your investing account. You also invest $700.00 in an income stock, and $800.00 in some sort of bond exposed instrument, and receive dividends from both.
After 6 months, the stock market market takes a dive, and at the same time, the bond market is expecting and receives an interest rate hike, so bond prices fall as well during a ‘re-adjustment period’.
The investor with example A, just has to ride out all of that draw-down, collect some dividends, and hope a scenario of tail risk does not develop wherein the situation deteriorates further and he is left simply ‘hoping’ that things turn around. This investor has no maneuverability. He or she cannot take advantage of new situations that develop. They cannot evaluate their positions positions to see if they financially remain stable, and if so, average down on that position. They simply have to hold on … and well, that’s it.
Whereas the investor with example B? Has another $1,300.00 to invest after 6 months. Nearly the amount of what they initially invested! They can choose to average down on existing positions. Or wait to evaluate the situation in which case they will have even more funds to invest … adding to their ability to maneuver. Heck, they can do both! Both average down and to improve their cost basis on a stable instrument, and then as capital is added, again evaluate the environment.
Do not under-estimate it’s importance. For both Sharpe Income projects such as this one, and even trading accounts! When I first began trading, I added $35.00, each and every week.
‘Sharpe Income’ Actions This Week
For the purpose of this project, we now have $314.30 in total that is available, that is ‘segmented’ into a few different categories. Here is what we are concentrating on this week …
Remaining Cash after Reservations: This week, I am contributing the entire $25.00 weekly deposit towards this category. At the present time, we have $259.20 available for any instruments purchase. At this stage of the game, we generally want equal sized purchases of near about’s, $300.00 or so. Once again … I have the purchase of a stock for this project on my radar. It’s pulled back nicely, and I want to make sure I have the cash to purchase more shares when the time is right. More on which stock this is later. For right now, we only have a few more capital contributions, before the capital is available to do this.
The link to the Google Drive Spreadsheet that you can view, that we will edit, build upon and refer to over time can be found at this link.
We continue the Sharpe Income project with this next entry.