Building YOUR Strategy for Money Management

When teaching or helping others with the process of trading and investing one of the first questions I ask is, “Why?” What is the purpose you are trading/investing your money for? After more than thirty years of this question I am still amazed at and by the responses. The unequivocal number one answer is…”to make money.” I cannot argue with that answer, even though I did raise objections to the answer in my earlier years, but now it truly is the answer that most people believe as to why they should invest or trade their money. The challenge comes with the open endedness (my word) of the answer. You leave yourself subject to emotions in the money management process. By better defining how much you want to make… (I understand it is as much as possible, another open ended answer that can lead to problems) you will need to better define when you need access to the profits, how much tax you will have to pay on the money, do you want to take a long or short-term time horizon, etc. etc. etc. The better you can define and break down the purpose of the money the more directed the process will become.

Some people refer to this as the strategy for investing your money. I would like to add the word discipline to the strategy. The definition is two fold… first, training to act in accordance with rules; drill. Second, activity, exercise, or a regimen that develops or improves a skill; training. A third is, a set or system of rules and regulations. As you can see when we add the word discipline we put some structure around the strategy that will help us put the strategy to work by learning the necessary rules, exercise and regimen that reaps success. Most people think of discipline in term of a negative process or not having fun, but in reality it is a process or procedure we are in control of developing. We learn rules that apply to our purpose or strategy for investing. We apply them in a way that fits our personality and character to achieve our goals and desires. Simply put… we are in control of the learning, building, testing and validating process of what strategy works best for us. Thus, a learned discipline that you are in complete control of is much easier to implement and practice than one we are told to do or worse, has not flexibility.

We should take the opportunity to learn from others and use the parts that fit, but equally important is to learn the simple rules of investing or trading. The markets function under a set of regulations and mandates and understanding how those work will make the process much easier to develop. There are so many things you can learn and do when it comes to investing… the key is to gravitate to those that interest your, motivate you, and ring true to your personality and time commitment to the process. If you want to spend two hours per week on the process you will not want to trade complex options strategies in the first week. Match the variables with your parameters and start simple. Then you can grow the complexity to whatever level you want based on the time and desired outcome you are looking for.

On November 18th we taught a webinar on “Creating a Discipline Strategy” for trading or investing. The objective is to outline the basic parameters to building a disciplined strategy to managing your money. We will cover the ten rules/guidelines you will want to put into the process of building, practicing and implementing your strategy. The most important of which is to answer definitively the why factor. When I first started teaching and working with individuals in the process of managing money I didn’t (still don’t) understand fully how challenging this is for individuals to define. A good process is to take out a sheet of paper and start writing what you want from your money… retirement, house, car, education for children, charity, travel, etc. When you see what you want you can then assign them a priority within your life going forward. How much time do you have between now and when you want the specific purpose or objective? Be realistic about returns on investments. Be realistic about how much you can save. Be realistic about your current situation relative to what you want to accomplish. If you are retired with $500,000 and want to earn $200,000 per year, you may need take a step back and rethink the objective. It is important/essential to define this prior to developing your strategy for investing your money. In many ways the ‘why’ will shape and define the ‘how’. It will also define risk and what investment vehicles fit the best for what you are attempting to accomplish. The whole process become much easier to define, develop and refine when you know what you want from the process/strategy.

Jim