Smart and Simple Money Management Technique

si_smart_inves_simple.gifVery few investors make money in the stock market.

Look at where your account is today compared with what you had at the beginning. Don’t count what you have added during that time or interest income. Most folks are still running a loss.

Your broker, if you are unlucky enough to have one, will assure you that the market always comes back and you are in for the long haul. So don’t worry, be happy.

If you were one of the few (about 1%) who had a broker or financial planner that actually knew how to protect your money you would not have lost a huge portion of your portfolio from 2000 to 2003.

So, you have to learn to protect yourself! It is a lot easier than you think and most brokers are not even aware of it.

It was time to buy. Divide the portfolio into 10 equal parts. Select 10 mutual funds that have quit going down and are now going up and buy these. This doesn’t have to be done all in one day. Spread it out over the next 2 or 3 months as good equities present themselves.

Here is the key. Don’t lose money. Laugh out loud, thats what you do. Place a 10% stop loss order on each fund that was purchased and as each fund advances raise the stop every month. The investor has 10 separate positions with a 10% risk on each one. If the selection of the fund was poor and it goes down instead of up the loss is one percent (1%) of the total portfolio.

The investor has been smart enough to diversify into several sectors so the chance of losing in all 10 positions is very small. Do not buy individual stocks. Few investors are capable of choosing company stocks. Let the mutual fund manager do that. As stops are hit, find other good equities that are going up. When the market turns down you will be in cash as you will have been stopped out of all positions with nice profits.

Brokers don’t know much more that you do (and I’m not kidding). This simple strategy will spread risk, prevent large initial losses and prevent giving back profits as they are made.

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6 Responses

  1. Jag says:

    Hi Robin,

    Good advice there. I particularly like the one on “don’t lose money”.

    Many people think about how much they gonna make when investing, when the actual priority is to think of not to lose money first.

    Lose 50% and you have to gain 100% just to break even. I guess this just about sum up about the importance of not losing money!

    Cheers,
    Jag

  2. Robin Bal says:

    Hey Jag,

    Thanks mate, so true, people think how much they gonna make investing while the priority should be to think of not losing money.

    Investing ain’t an easy game to play but it sure is simple, if you learn how to go about it.

    Cheers buddy and take care.

  3. Shane says:

    That’s a simple and brilliant strategy Robin. Love it.

    I’ve got one point and I’d love to hear your take on this: You’ve got stop-loss covered, but what about floundering returns? You know the stocks that bring in measly returns.

    How would you target the aggressive movers that might be a little volatile?

  4. Robin Bal says:

    Hi Shane,

    Thanks for your comment and query. Just like we have stop loss covered we should have have book profit covered too. Enter the market with an objective, let say you buy 1 stock for 100$ , you investment objective could look like , book loss at 90$ and book partial profit by selling 50% stock at 120$. This drops your amount invested or amount at risk to 60$, and again your stop loss and book profit levels change accordingly.

    Measly returns are still returns mate, if you are expecting to make a higher profit, you are expected to take a higher risk. Two things I always advice my clients, stay away from very high risk investment’s and don’t do what the average investor is doing, stay away from the crowd. I hope this answers your question mate, feel free to post me any queries.

    Aggressive movers are great, you have to base your decision on your attitude to investment risk and your time horizon. If you have a longer time horizon, my experience so far has shown me that being aggressive is better. A point to note here is that my experience is not necessarily a guide to the future.

    Give me an idea, should do a post focussed on your query.

    Take care and Cheers mate.

  5. Shane says:

    I trying to look at it as attaching a timeframe to getting aggresive returns …

    If you looked at raising your stop-loss price up, for example, 10% to $100 after a month, and the stock is not above that, then to be aggresive you would sell it and find another one.

    I’m trying to look at this from the perspective of not just limiting loss but actively seeking better performing stocks. Does that make sense?

  6. Robin Bal says:

    What you say does make sense, but patience is another virtue needed for stock investing, give it time. A better performing stock is a good idea, but will it continue to perform the same way? I feel you have a day trader kind of approach to investing and thats fine if you can be actively involved.

    Cheers mate and good luck.

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