Money management is arguably the most important – yet overlooked – strategy when investing. You see, managing your money efficiently can be the difference between a loss and a gain. Even worse, it could be the difference between a small loss and a total portfolio wipe out. That’s why, before you even think about making another investment, you must know and follow these money management rules…
Money Management Rule #1: Never invest money you CANNOT afford to lose!
This is probably the most important rule of all… Yet surprisingly many investors ignore it completely. Don’t invest with borrowed money. Don’t invest using your life-savings, emergency fund or any cash you need to pay bills.
Even if you don’t lose money, which is always a risk when investing, you will be sitting with a load of stress and anxiety. That’s not what investing is about. It’s supposed to be “fun” and not keep you awake at night.
Most importantly, never invest with money you cannot afford to lose. This is key in volatile markets like cryptos, small caps and exponential tech stocks. Because the prices of these investments can swing 20%, 30%, 50%, even more in a single day.
Let’s say you invest R10k and the asset you bought drops 50% in a single day. Now, you only have R5k left. Imagine you invest R100k?
Can you afford to lose R50k in a day? Not many investors can.
Rule #2: Keep costs to a minimum
With the average broker, the costs to buy and sell will be around R200 each way. So, if you have R2,000, you’ll only be able to invest R1,800 worth of shares. Add another R200 when you sell them and already 20% of your investment has gone to costs.
That means, if the share you bought rises 20%, you still won’t make any money.
On the other hand, investing with R6,000 with a 20% profit will earn you R800 after costs.
The main takeaway?
Try and aim to make larger investments to avoid having costs make up the bulk of your trade.
There’s a simple formula you can use: Minimum investment size = minimum brokerage fee/brokerage costs %.
So, if your broker charges a minimum fee of R60 per trade, and thereafter 0.6%, the calculation looks like this: Minimum investment size = R60/0.6% = R10,000.
The good news is that thanks to low-cost investment platform, EasyEquities, broker costs have a negligible impact on your returns.
Rule #3: Don’t ignore “buy” price levels…
A buy price is the maximum price you’re willing to pay for a share or investment. Buying a share that’s over a buy price is a sure-fire way to reduce your potential upside and increase the risk you take. Let’s say that you come across a recommendation to buy a share that costs 100c…The opportunity excites you and the potential returns you could make look incredible.
The recommended buy price is 90c or below…
If you bought at 90c, and the share soars to 200c, you’d make a122% return…
But let’s say you decide to buy the share at 130c, your return now will only be 53.85% at a far greater risk.
In my view, rather wait until the share falls below 100c again to buy or just move on to another opportunity. There’ll always be plenty. You can even set a buy limit order, which allows you to buy a stock at a certain price.
For example, if a share cost 100c with a buy up to price of 90c, you can place an order with your broker to buy at 90c. Your trade will remain unfilled until the share hits 90c or less, at which, your order will be automatically filled.
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