Money management is an important part of every investing or trading plan. Whether you are an active trader or a long-term investor, your success will depend on how you manage your investing dollars. You cannot control the markets, but you can control your money and your risk on each and every investment you make. Uninformed investors typically make the same common mistakes that can be avoided by implementing a simple money management strategy.
Investing fallacies and mistakes:
• Buy and hold
• Buy and forget
• Mutual Funds
• Professional advice
The Buy-and-hold theory deserves top billing in regard to fallacies and mistakes. Investors fail to include money management in their investing plan because they have heard phrases like
“The stock market has historically produced a 10% return on investment”
“Missing the best days IN the market”
“The market has returned a profit over 20 year rolling periods”
This is covered extensively in “Common Sense Investing” but I’ll just say this – All three of those phrases are profoundly misleading.
1. If the investor missed the best days in the market it would certainly affect the return on investment. However, if the investor missed the worst days in the market the return would be much greater. And missing both the best days and the worst days in the market also produces a good return.
2. The reason “20-year” rolling periods is used in sales techniques is because anything less would not work. There have been 18-year time spans during secular bear markets that there was no net gain on investments. Not to mention that after 1929, investors waited 25 years before a net gain was realized.
3. Buy-and-hold is only profitable under some circumstances, with certain investments, and during specific times. Need I remind you of Enron, Worldcom, JDSU, SUNN, LU, GM, AOL, and hundreds of others?
Mutual fund investing is popular and many fail to realize that there are over 15,000 mutual funds available; only a very small percentage make money; finding one that does is difficult; and during market declines, market corrections, and bear markets, a fund value will also decline.
Relying on a financial advisor to make your investing decisions can be the worst investing fallacy of all. Realistically, will a commissioned salesperson advise you to wait for a better time to invest? No. They will sell you an investment during the worst market conditions. Countless mutual fund investments were sold during 1999, 2000, and 2007. Those uninformed investors are likely still waiting to break even.
Investing under the premise of any of the above fallacies without a specific money management plan can be financial suicide. Before risking your hard-earned money on any investment thinking how much profit you will make, instead, think how much you are willing to lose.
Your money management strategy should always answer these questions:
• How much money should I risk on this investment?
• Where do I exit if I am wrong?
When developing an investment strategy, always remember that timing is everything. It does not matter if you buy the stock market darling of stocks or the current most popular mutual fund, if you purchase at the wrong time you will lose.
The amount you are willing to lose must always be determined before you invest in case you are wrong. You can be successful only by limiting your losses.
Some simple rules to follow:
1. Educate yourself and be an informed investor
2. Know when to invest
3. Implement a money management plan
A successful investing plan not only requires proper money management, but also the knowledge of knowing when to invest Charting and Technical Analysis provides the investor and trader with the tools to be on the right side of the market Common Sense Investing is filled with profitable strategies for the long-term investor. Investing with the market instead of against it is half the battle.