3 Key Money Management Tips — and a Bonus

by John Lansing | June 9, 2012 9:00 am

Managing money wisely is one of the most difficult aspects of stock market trading to master. It refers to all the nitty-gritty detail work you have to do to make all your trades work together as a successful portfolio.

It’s not always easy, and it’s not always fun — but it’s crucial to coming out of the game with profits on the table.

There are three basic components to money management for traders: allocation, record-keeping and minimizing costs.

1. Allocation

When it comes to losers, we all know what to do — hold. It’s the winners that we have the biggest issues with because we’re not used to a lot of them. So, let’s talk about investment portfolio management and the word “dumb.”

First and foremost, no position should ever be more than 5% of your investment portfolio. People get into the biggest trouble when they hear someone excited about a stock or are excited about it themselves, and they think for sure it’s going to skyrocket. They think, “It’s got to go to the moon, because did you not hear how he talked in that update? It’s a sure-fire winner!”

But even though the majority of positions in a portfolio may be winners, some will be losers. This calls for strategic asset allocation, meaning that you can’t allocate too much to any single position. Poor asset allocation is a sure way to ruin a portfolio of winners.

But why did I mention the word “dumb” at the beginning? That’s simple: Because from this point forward, we will never be as dumb as we are right now. Five minutes from now we’re going to learn something new. And that makes us smarter. Tomorrow we’re going to learn more. And that’s going to make us even smarter. The next day you’re going to learn even more. And we’re going to be even smarter.

So as far as dumb goes, we’ve officially bottomed as the human race, because tomorrow, and the next day, and the next day, we’re going to keep learning new things. But don’t forget what you have already learned, because the last thing you want to do is make dumb moves in your portfolio management.

2. Recordkeeping

You can trade year-in and year-out without ever violating the rules of allocation, but if you don’t keep track of what you’re doing, you won’t know if you’ve actually made progress. A simple way to do that is to keep a trading journal.

In your daily journal for stock trading, you should note all the information relevant to each trade you make. Your trading journal template (how it’s formatted) is up to you. Whatever works best for you is fine — but it’s important to keep it consistent and organized for easy reference and comparison.

Here are some things you should note in your journal:

After all, if you don’t know what you’re doing right, you can’t develop the skills you already have. And if you don’t know what you’re doing wrong, you could end up blaming “bad luck” instead of correcting bad habits.

Knowledge is power. Even better, knowledge is profits. Especially if you’re going into technical analysis.

3. Minimizing Costs

When it comes to trading, you can’t ignore costs. Whether it’s ongoing expenses of an ETF or commissions you pay to make trades, costs always reduce your overall return. And just like with returns, you can’t just look at the dollar amount of costs — you have to look at the percentage. After all, the smaller your portfolio, the more trading costs will hurt you.

For example, let’s say each trade costs you $7. If you pay $7 to buy $100 worth of stock, your cost to initiate the trade is 7% of your principal. And if you pay another $7 to sell it, your cost to close the trade is also 7%. So your total commission costs are 14% of your principal ($14/$100), meaning you have to make at least a 14% profit in that stock just to break even. Those sure aren’t very good odds.

But let’s say you put in $1,000. The $14 you spend for one round trip in and out of the stock is only 1.4% of $1,000, giving you much better odds.

You should note that you might incur fees if you move your money from your current broker to another, and you might end up paying commissions to the above brokers if you trade frequently, or if your balance falls below the minimum. So, you should be sure to explore all the fees and services of each broker before making any decisions.

Whatever broker you choose, a good rule of thumb is to make sure that your portfolio expense ratio stays as low as possible. The lower it is, the better, because every dollar you save means more profits on your bottom line.

Three Winning Trades

Put the three tips I discussed above to work and take advantage of the trades below. Based on my charts and technical analysis, the following ETFs are all set to decline. Want to hear more about my trading style? Then visit us at Trending123[1]!

1.) ‘Sell to open’ iShares Nasdaq Biotechnology (NASDAQ:IBB[2]) at current levels.

2.) ‘Sell to open’ iShares Russell 2000 (NYSE:IWM[3]) at current levels.

3.) ‘Sell to open’ SPDR S&P 500 (NYSE:SPY[4]) at current levels.

Endnotes:
  1. visit us at Trending123: https://order.investorplace.com/?sid=WRA259
  2. IBB: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBB
  3. IWM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IWM
  4. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY

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