Your Number One Investing Skill: Money (Not Monkey) Management

Monkey on the investing blog

Investing is more about how much to buy and when to sell than it is about what to buy.

Money management is about a deep understanding of our unique investing psychology.

This is the most important page on our website. The difference effective money management has on investing and trading returns cannot be overstated. Following money management disciplines that have been forged in the heat of battle is where your edge lies. It is where we, as retail investors, maintain our advantage over our institutional counterparts.

On top of this, money management rules must be deeply connected to the psychology of the trader or investor using them, and their goals. Investor’s leave themselves open to failure if they don’t understand the psychology behind their money management rules.

This is why we are successful where others are not. Our whole strategy is designed with an intimate knowledge of the psychology of traders and investors. You will find it easy to follow the SpoonFed Investor’s beautifully simple investing ideas, not because we give you very good stocks to buy, but rather because our money management makes it easy for you remain disciplined and stay the course. That is the beautifully simple secret to investing success – no matter which way the markets move.

What is money management?

Money management is the art of how much to buy and the craft of when to get out of a trade or investment.

When you first enter into a position you need to decide how much to buy. This could be 3 or 5% of your portfolio, or it could be 100 shares of a certain stock. Once you have bought it, you need to sell it at either a profit or a loss. Money management encompasses both these aspects of investing and trading.

Money management is linked to your investing psychology. The decisions we make about how much to buy and when to sell are associated with what we want as individuals. If these decisions are out of whack with our personality, or we are undisciplined in our approach, it can hamper our investing.

Money management is also known as position sizing or risk management.

Why is money management so important?

If people start investing with the same amount of money and purchase the same stocks many people would expect their returns to be the same or roughly similar. Studies show this is far from the case. In fact, in one study of 100 investors starting with $100,000, each participant ended up with different final results ranging from bankrupt right through to 13 million dollars! We don’t point this out to suggest that we can achieve such dramatic results with money management. Rather we want to illustrate that how much you buy and when you sell have a very large impact on your bank balance.

On the other side of the coin, deciding when to exit is incredibly important. If you don’t have a solid plan on when to exit, you will face a few problems. If your stock or currency moves against you, you might end up in trouble, particularly if you brought too much in the first place. This can be not a nice feeling! If the stock goes in our favour, there is nothing worse than the market turning around and our winning investment turning into a losing one. Alternatively we don’t want to sell out of our trade prematurely and watch as the stock we sold rockets off to the moon without us on board! These things play havoc with our psychology as investors, so we need a strategy in place that manages this scenario.

Traders and investors should not fear losses. Come to embrace them as a cost of doing business, with a realisation that over the long-term, you will come out much better off, with your successes far outdoing any losses you might take.

Our money management strategies

While our money management ends up being expressed simply as buy or sell X%, there is a fair bit of depth to the decision. Fortunately a large part of the decision fits inside a framework of pre-built rules, such as never placing more than 5% of your portfolio into one idea. Having these hard-and-fast rules in place that we simply cannot violate keeps things nice and robust. But it’s not really enough to produce superior performances.

We will analyse the stock we are buying, the overall trend of the market, the stock’s fundamentals, as well as whether it could be considered over or under valued, and adjust our position size accordingly. This means that when we think things are risky we buy less and when we get a really juicy opportunity we buy more. We spoon-feed exactly how much to buy in our beautifully simple investing ideas if you would like to follow along.

If the market moves against us after we get in, then we are prepared. We will either exit out of the position and look to buy back much earlier, or we will protect our position from further falls using hedging strategies. For more information on hedging you can read our crash protection page.

If our investment or trade moves in our favour, then we might look to take profit if we see a sign that the market could be turning against us. If it keeps going up we can take a bit more and leave a portion on the table for the really big wins. This is psychologically powerful, as it means we are constantly locking in a bit of profit, while at the same time we can feel comfortable that we will be in the position if it does really take off. Of course there are some limitations on doing this, depending on the size of our positions and the commissions we would need to pay each time we take an action. If this sounds good to you but does seem a little bit intricate, don’t worry, we spoon-feed all of this in the beautifully simple investing ideas we deliver to you

General Advice Warning and Disclaimer: The ideas and information contained in this blog post are for general information only. They do not take into consideration your personal circumstances or objectives. Please considering if these ideas are appropriate for your needs before taking any action. We suggest you seek advice from a financial professional if necessary.

In addition please note that past performance is not always a reliable indicator of future results.

About the Author

Sam Eder

Sam Eder is the founder of the market beating SpoonFed Investor stock investing service. He is also the author of several books and courses.