Archive for the ‘Money Management’ Category


October 27th, 2011 Comments off

DETERMINE YOUR TRADING BANKROLL: Set up your trading account so that you can decide on the proper chip size to play with. The size and number of your bets should always be in direct proportion to the depth of your pockets.

Set up your trading account so that you can decide on the proper chip size to play with. The size and number of your bets should always be in direct proportion to the depth of your pockets. For example, let’s say that you want to take a conservative approach to the market and have $100,000 to trade that is not part of your security assets. First, you set aside 80% or $80,000 in an account designated as growth funds to be invested for the intermediate-term time cycle in no-load index mutual funds. Then you put 20% or $20,000 in a separate play-money account for trading the short-term. With your short-term trading account, you’ll want roughly half of that amount available for immediate play and the other half in reserve. This equates to having $10,000 of your tactical funds available to play Wall Street Craps at any given moment and backing it up with $10,000 in reserve. This simple example will keep your money under control, limit your exposure to immediate risk, and lower the degree of fear that you’ll encounter when playing this challenging game as an amateur.


“For the trader or investor, discipline means to exercise good and prudent money management and risk management. Sun Tzu said that the general who follows these principles will be victorious, and so shall you.”

Dean Lundell ~ Author of Sun Tzu’s Art of War For Traders And Investors (1997)

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October 26th, 2011 Comments off

USE SEPARATE ACCOUNTS FOR SECURITY ASSETS, GROWTH FUNDS & PLAY MONEY: Take away the temptation to dip into funds that are designated for other purposes by using separate accounts for security assets, growth funds, and play money. Otherwise, you could be playing a volatile short-term game with money that is designated for longer time periods.

The money that you set aside as security assets is designed for the long-term time period of the market, which is usually expressed in terms of years. The growth funds portion of your asset allocation plan is set aside for the intermediate-term time cycle, which usually equates to several weeks or months. The best way to prevent overtrading your security assets and growth funds is to put the money for each of these purposes in separate accounts and in different types of investment vehicles.

For stock market investments in the security and growth portions of your plan, I would suggest using appropriate no-load index mutual funds with the lowest annual management fees – such as those offered by firms like Fidelity, Charles Schwab, and Vanguard. Mutual funds, as opposed to individual stocks and exchange-traded funds, have three main ways of detouring people from the temptation of excessive trading: (1) traditional mutual funds impose extra fees on investors who trade their positions frequently, (2) prices of mutual funds are not quoted hourly and followed as closely as active stocks, and (3) investors usually hold uneven and fractional shares of mutual funds (example: 156.789 shares of Fidelity Magellan Fund), which has a way of causing many people to stop taking inventory and leave their holdings alone.

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October 26th, 2011 Comments off

A SIMPLE GAMBLING ANALOGY: Another way of looking at the dynamics of how security assets, growth funds, and play money can work for you is to take a trip to Las Vegas – the gambling capital of the world. I use this example because it clearly illustrates the differences between the money management strategies of savvy gamblers and those of the average tourist who tries their luck there.

The average tourist who gambles in Las Vegas doesn’t think too seriously about the money aspect of going there. To him or her, this is just a vacation to try his or her luck at a wide variety of gaming options. Therefore, the amount of money he or she chooses to put at risk is often subject to how he or she feels while in the casino. If the average tourist gambler should run into bad luck early in the trip, he or she will likely visit the ATM machines conveniently situated at every casino to replenish his or her funds. As a result, the tourist gambler without a plan can easily lose more money than he or she physically brings on the vacation to Las Vegas.

On the other hand, the savvy gambler only plays the games which offer the best mathematical odds of winning. One candidate for play that offers good statistical odds is the dice game known as Craps. When playing Craps, the savvy player understands that his or her money is allocated in the following ways: (1) the bets he or she has playing on the table, (2) the chips sitting in his or her tray, (3) the cash he or she keeps in his or her wallet, and (4) the money he or she has tucked away safely in his or her savings and brokerage accounts away from the casino’s reach.

In other words, the savvy craps player wisely keeps the overwhelming majority of his or her money in security assets and growth funds, where it’s not to be touched during the stay in Las Vegas. He or she has predetermined the amount of play money that can be risked. These funds are then separated between bets in play, chips in the tray that are ready to play, and money in the wallet that can be assessed for temporary reinforcements.

The clear separation of financial assets allows the savvy gambler to play at the proper level in relation to his or her “bankroll” or overall financial position. As a result, savvy players will never let bad luck at speculative high-risk games of chance be their sorry excuse for financial ruin. These wise folks fully understand that the manner in which they divide and manage their money lowers their overall risk to loss.

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October 26th, 2011 Comments off

THE SURE WAY TO GO BROKE: The traditional asset allocation strategy illustrates what asset classes to put your money in based exclusively on risk tolerance. The plan I suggest goes one step further, by separating your money into more clearly defined objectives for achieving long-term financial wealth.

There’s a common pattern that people experience when they go broke in the stock market, and here it is … a periodic down cycle occurs at precisely the time their asset allocation plan is structured in the following way:

• 0% to 5% Security Assets – 95% to 100% Play Money

There are three primary faults with this investment strategy. One, there aren’t enough security assets to fall back on for stability and peace of mind. Two, there aren’t any funds that are designated for conservative intermediate-term growth. And three, there’s too much money at risk in volatile short-term speculation and aggressive growth.

This unwise strategy is exactly what happened to a once-wealthy client of an accountant that I know. As a result, he drained his family’s retirement accounts, savings accounts, and cash-value life insurance. Not only that, he went a step further by borrowing against the equity in his house in order to participate in a speculative real-estate deal. When the economy turned down in 2008, this fellow’s real-estate deal went bust, and as a result, he lost all of his money with nothing left to fall back on. If only he had understood the wisdom behind proper asset allocation and had maintained the discipline to follow such a plan. If he had, this guy would have survived the last economic downturn with the majority of his family’s wealth intact.

Is long-term wealth creation for financial independence and peace of mind one of your primary objectives? (I would guess that it will be for most of my readers.) If so, a deep understanding of intelligent asset allocation will become one of your highest priorities. Why? Because the wisdom of your core strategies for money management will have a greater effect on your future financial wealth than all of the clever tactics you could ever learn for short-term stock market trading.

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October 26th, 2011 Comments off

HOW TO WIN AT THE BIGGER GAME WITH THE NEW ASSET ALLOCATION MODEL: The starting point for creating your own new asset allocation plan is to set aside money in your security assets class. This should be in the range of 50% to 90% of your total investment funds. Once this money has been portioned off (so it can’t be accessed for trading purposes), you can use the following guidelines to allocate your remaining funds in order to play Wall Street Craps for faster returns with calculated risk:

• Conservative: 80% Growth Funds – 20% Play Money
• Moderate: 65% Growth Funds – 35% Play Money
• Aggressive: 50% Growth Funds – 50% Play Money

It’s true that you might miss out on making a huge killing by following this investment strategy. However, it will also prevent you from being crushed by an unexpected financial downturn. Thus, this long-term strategy will allow you to invest while gaining peace of mind – one of the highest values in an enlightened person’s life. You’ll also become a winner at the bigger game of financial independence, even if you should be a net-loser at the smaller game of stock market trading.

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October 26th, 2011 Comments off

HOW TO WIN AT THE BIGGER GAME WITH PLAY MONEY: And lastly, let’s discuss the asset category called play money. This is the smallest portion of your asset allocation plan, and it is comprised of:

• Actively traded individual stocks
• Aggressive-growth stock funds that are traded on a shorter-term basis

Remember, security assets are designed for stability, and growth funds for designed for capital appreciation. In contrast, play money is meant for speculation in order to take advantage of timely opportunities that have intelligent risk/reward trade-offs. Because of the inherent risk involved with short-term trading (daily-to-weekly time frame), the play money portion of your asset allocation plan should never exceed 20% of your overall financial assets. In most cases, play money should represent far less than 10% of a prudent investor’s total assets.

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October 26th, 2011 Comments off

HOW TO WIN AT THE BIGGER GAME WITH GROWTH FUNDS: Now let’s take a quick look at the second asset class called growth funds. The money in this portion of the allocation plan is set aside for investment vehicles where additional risk has the potential to reap higher corresponding returns. This money only comes after your security needs have been sufficiently covered. Investments in this part of your asset allocation plan include:

• Large-cap equities (stocks of large companies)
• Small-cap equities (stocks of small companies)
• International equities (stocks of foreign-based companies)
• Equity-based mutual funds (stocks of several individual companies)

In this model, the portion of your money set aside for growth funds should never exceed 50%, and in most cases, it will represent more in the area of 20% to 30% of a person’s financial assets. The percentage depends on the individual’s situation, in regards to age, earning power, risk tolerance, present needs, and future desires.

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October 26th, 2011 Comments off

HOW TO WIN AT THE BIGGER GAME: Like the traditional asset allocation model, I propose that the investor divide his or her capital into three parts. The difference is in how these parts are labeled. Instead of stocks, fixed income and cash equivalents, it may make more sense for investors to divide their financial assets into strategic categories that I call security assets, growth funds, and play money.

In this model, the category called security assets makes up the majority of investment capital – typically 50% or higher. The category of growth funds is the second largest component, followed to a much lesser degree by that which I call play money.

Here’s a more detailed description of this alternative asset allocation model. Using it, I believe that you can become more effective in managing your money in today’s volatile financial climate.


Let’s begin with the category called security assets. The money that is set aside in this part of your asset allocation model is directed towards stable lower-risk investment vehicles designed to preserve capital and handle your basic needs. Investments that fit into this asset class would include:

• Treasury bills
• Treasury notes
• Corporate bonds
• Government bonds
• Municipal bonds
• Commercial paper
• Certificates of deposits
• Permanent life insurance
• Saving accounts
• Money market funds
• Individual retirement accounts
• Pensions/profit-sharing plans
• Total market stock index funds
• Conservative income-equity mutual funds
• Diversified portfolios of dividend-paying blue chip stocks

It is your security assets that will serve as your financial foundation, and they will bring you that all-important emotional benefit called peace of mind. Therefore, your security assets should wisely represent no less than 50% of your total allocation plan. In most cases, the prudent level of money that is designated for security assets should be aimed more towards the 80% range and beyond as an individual’s financial wealth grows.


“The individual who acts and dares to make a decision now – not tomorrow – is the one who ends up with millions.”

Mark Oliver Haroldsen

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October 26th, 2011 Comments off

DRAWBACKS TO TODAY’S ASSET ALLOCATION MODELS: The asset allocation model remains the most widely accepted method for helping people understand how to invest their money. Yet it also comes with some important drawbacks. Some of the often-overlooked flaws in the typical asset allocation model that are promoted in the financial services industry include:

Savvy investing requires an investor to put his or her money in the right place, in the right amount, and at the right time. Unfortunately, the typical asset allocation model doesn’t allow much for the element of timing. Perhaps this is because timing the stock market, whether it’s buying at the bottom or selling at the top, is an area of investing that many people assume cannot be done either effectively or consistently.

The financial products industry loves the “nobody knows what the markets will do” mindset because it gives them the convenient excuse to sell the public almost any well-packaged investment product in the name of diversification. The high-commissioned sellers of precious metals, real estate limited partnerships, private-placement fixed income plans, and assorted investment schemes will often employ the asset allocation model on unsophisticated investors. That way, they can conveniently carve out a seemingly small 2% to 5% piece of an investor’s investment capital without raising much concern. They also do this with the unspoken understanding that individual investors have a greater tolerance for allocating money in percentages than they do with actual dollar amounts.

Fixed income returns are historically low, and cash equivalents s yield close to nothing. In addition, fixed income, in the form of bonds or bond funds, are subject to price fluctuations which may result in capital loss. So for many investors today, fixed income and cash equivalents are essentially the same unattractive choice.

More important than any single investment decision will be your philosophy towards investing. Because of the drawbacks stated above, a savvy investor should look beyond the standard asset allocation model presented by the financial services industry for developing their long-term investment planning. Instead, choose a more refined approach to investing that makes sense and works more precisely to fulfill your ever-changing financial objectives.


“Wide diversification is only required when investors do not understand what they are doing.”

Warren Buffett ~ CEO of Berkshire Hathaway

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October 26th, 2011 Comments off

Asset Allocation: 1. the process of intelligent decision-making regarding the placement of financial assets for investment purposes. 2. the ability to move financial assets from one investment class to another, based on prudent risk/reward evaluations and individual investor objectives. 3. the critical decisions that savvy independent investors must make regarding where to put their money and in their proper amounts in order to play Wall Street Craps successfully over time.


Effective money management is the process of maximizing after-tax earnings, spending money wisely, saving or budgeting for predetermined expenses, and investing funds for future needs and desires. In regards to the investing part, the financial industry commonly uses something called the “asset allocation model” to help investors understand the concept of where to distribute their money in regards to risk tolerance (how much uncertainty an investor can handle in regards to financial loss) and investment objectives.

Typically, asset allocation models start by dividing a person’s funds into three separate investment classes which are stocks, fixed income (bonds, notes, preferred stocks), and cash equivalents (saving accounts, money market funds, or Treasury bills). A simple example of asset allocation strategies based on an investor’s tolerance to risk would include the following:

• Conservative: 20% Stocks – 50% Fixed Income – 30% Cash Equivalents
• Moderate: 60% Stocks – 35% Fixed Income – 5% Cash Equivalents
• Aggressive: 95% Stocks – 0% Fixed Income – 5% Cash Equivalents

The stock portion can also be further divided into three sub-classes: large-cap equity (stocks of large companies), small-cap equity (stocks of small companies), and international equity (stocks of foreign-based companies).

Asset allocation models are often illustrated with pie diagrams. That way, investors can develop a clear visual image of where to put their money based on the risk level that best suits their own individual situation.


“Avoid greed and fear. These are the investor’s Achilles heels. Keeping all your money in the bank earning 1% interest is just as foolish as dumping your entire savings into the market thinking you’ll make a quick buck.”

Nancy Dunnan

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