The Role of Money Management in Investing

In the past years, there has been very little attention paid to this aspect of financial planning. This is the main reason that people do not make the returns that they would like to make from their investments. The best advice that we could get in the past was, “Don’t put all of your eggs in one basket” or “Investing is like a three-legged stool; put some money in stocks, some money in mutual funds, and some money in bonds.” This advice might have been of some help, but probably would not give you the comfortable retirement lifestyle that you would like to have.
Money management is the most important factor in making money by investing. It is really difficult to keep your mind clear and your eye on the ball when the market is soaring and all investments are rising in price or when the market is falling fast and most investments are losing value. What do you buy and what do you sell? This is not a good situation in which to be. Buying and selling decisions should be planned and made with a clear mind. This is where money is made or lost.
It is best to have a set of rules that you use to base your buying and selling decisions on. This should keep emotional and greedy decisions in check. Remember: “Bulls make money, Bears make money, but Pigs don’t.”
Bill Astrop, President of Astrop Advisory Corp. in Atlanta, Georgia, recommends a minor revision of the 10% loss-cutting plan. He thinks that individual investors should sell half of their position in a stock if it is down 5% from their costs and the other half once it is down 10%. If followed, this strategy will provide you with funds to get back into the market when the economy changes.