Money management is difficult enough without adding complex trading strategies. For example, in a recent newsletter the following was posted, “I expect the market to decline today and therefore recommend October 40 calls on XYZ (changed for example purpose). I prefer this contract to gain liquidity for exiting the trade. This trade takes advantage of the two times leverage on the ETF plus the ten times leverage on the option, exactly what I want.” Even if these comments sound simple and innocent enough, the challenge is with the complexity of the strategy, not to mention the level of risk!
Whatever happened to simple money management? How did we get to the point where mainstream investment advice took on this level of risk and expertise? I know professional traders on Wall Street that don’t even manage money with this level of risk. Yet, there are more and more people attempting to put money to work based on this type of strategy. To make things worse, the above article goes on to discuss putting 20% of the portfolio to work in this trade and then boasts the success of doing so intraday. I am not refuting the truth of this boast. I am addressing the sanity of such a trading strategy!
For most investors simple is better. The more you understand and trust your ability to manage money, the better you will be over time. Remember the story of the tortoise and the hare? If the tortoise could manage his money and earn 10% per year without losing money, in any given year, then he is better off than hitting a home run on a twenty times leverage option play. He’d also be less stressed. Leave that type of investing to the hare and keep your eye on the goal.
Why are investors interested in these types of trading strategies? The get rich quick mentality for one. I believe investors have lost money over the last ten years and are looking for a way to catch up quickly. Taking more risk doesn’t help that situation, in fact, it only exacerbates the problem. Let me make a suggestion. KEEP IT SIMPLE!
I am going to focus this weeks’ comments on Simple Money Management for building a manageable portfolio. There are plenty of strategies available to manage money and the key is to keep it within your personality and goals. If you are a hare type investor, learn before you start running off with complex trading systems. For the rest of us, we will look at some simple strategies for managing money.
When I say simple that does not mean easy. Unfortunately, easy is not a word I associate with the process of managing your money. That is why simple works. As an example, setting a defined goal for your money is the starting point, and yet so few people spend enough time on the process. We are too excited about making money and we run right to the investment process. After all, the goal is to make money. Right? In its purest form the goal of investing is to make a return on the investment. However, without taking the time to determine the true goal of investing your money, you may go down the wrong path and not arrive at the appropriate destination.
One of the most common investment vehicles today is a 401k or IRA for retirement. Taking time to determine the goal is one of the least examined parts of putting money into one of these vehicles. I hear investors talk about the deferred taxation of the asset as the reason for investing, or because the company will match 50 cents on the dollar contributed. Those are benefits, not goals. The goal of a 401k or IRA is to accumulate a sum of money which will provide an income when you retire. If that matches your goal then you are on the right path. However, there are many other variables that go into the planning process and without them you may not accomplish all of your goals.
We will break this process down over the coming week or weeks to learn how to implement the process of simple money management. No one said the process would be easy, but we will learn how to keep it simple enough to implement. If you can implement it with confidence you will follow through and achieve your goals.