Managing You and Not the Market

It may often be quite difficult to use the word rational to describe the activity of the markets, which is why Jim Farrish, on Jim’s Notes, points out that proper money management is so crucial; here, he shares nine tips to help traders improve this skill by first improving themselves.

The word rational means based on or in accordance with reason or logic. I had to look that up today to see if it applied to the markets in general or at all. I know there are plenty of analysts, money managers, educators, and advisers who like to say that the markets are rational over the long-term. However, that may not be exactly true when you look at what drives the markets day-to-day or year-to-year. When you look at the markets in general—or specifically—it is very hard to use the word rational to describe the activity. For that reason it makes it even more imperative that you and I manage our money based on the reality that is before us and remain focused on what we are attempting to accomplish. Money management is about you…not the markets.

I love market corrections. Why? For the simple fact they remind me I am not crazy, but the market (made up of traders, investors, and dreamers) is. Market corrections reinforce my beliefs about the market…it is irrational short-term, definable based on history long-term, and an emotional train wreck on any given day depending on the news and events controlling the outcome. Therefore, it puts me in a position of managing me more than attempting to manage the markets. In fact, you can’t manage the market. To take it one step further, the market doesn’t even care what you think.

For my entire career in and around the financial markets there is always that quest to believe you can be in control when it comes to the markets overall. The reality is I cannot. I would go so far as to say no one can. If I take the approach of managing myself as I relate to the market, it is a much better process, but it requires that you know yourself and that you can be honest about yourself in order to manage yourself in relationship to the markets. That is no small task, which explains why so few people attempt this process. It is much easier to study technical analysis, fundamental analysis, or quantitative strategies and believe they will give us an edge over the markets now and forever. Or, you can just give you money to an adviser or Wall Street firm to manage and forget it…after all they are professionals. As Zig Ziglar used to say, “What the mind can conceive and believe, it can achieve.” That goes for lies as well truths.

NEXT PAGE: Managing Yourself in Order to Better Manage Your Money

The following are some key points to managing yourself which will enable you to manage your money.

1. Education. Learn what you need to know, when you need to know it. Trying to conquer the task of studying everything about the financial markets isn’t going to happen. Therefore, break it down into manageable parts that you need now. 401k and IRA contributions, debt elimination (yes, your house too), budgeting, estate planning, social security, asset allocation, dollar cost averaging, trading, and the list goes on. Educate yourself based on what you need to know now to accomplish your goals.

2. Answer the questions most important now. When should I start social security payments? How much should I contribute to my 401k, IRA, TSA or other retirement plan? Should I get long-term care insurance or look a assisted living? Should I learn about options trading? Do I need to learn technical analysis? Should I hire a financial planner. Ask the right questions to get you to where you need to be now.

3. Find a trusted source for information and education. Google offers you plenty of sources to review. It easy to skip the Ads, sales people, Wall Street names, and scams. Go to the sources offering education by terms, laws, and facts to help you make better decisions.

4. It isn’t about retirement, it is about income planning. You need income when your retire not advice about how to retire. Now is when you need to look at number one and two, three helps as well. When you know what you need in terms that make sense, education, important questions, and valuable sources are much easier to align.

5. Plan for unintended risks. Healthcare is the primary issue facing individuals today. Understand how to manage your money and protect your money in view of this issue.

6. Baby steps. Don’t run before you learn to crawl is the old saying. Find products like ETFs (exchange traded funds), mutual funds, REITs (real estate investment trusts), closed-end bond funds that allow you to buy specific asset classes with diversification built in. Learn to manage your money with better risk management tools than starting with individual assets that carry greater risks in market environments.

7. Learn the basics first and practice them always.

8. Define and practice good habits for managing your money. How to enter positions, exit positions, cut losses in losing positions, and how to manage your portfolio in pieces. The parts make up the whole and one bad part can ruin the whole thing. Manage the risk of your portfolio in light of you…not what others say…it is what you believe that matters.

9. Keep It Simple (KISS): I cannot emphasize this enough. The simpler the better from my view. Never take on investment products you don’t understand and never take on risk you cannot tolerate.

The task of money management is not easy. I have learned more from sitting across the table from thousands of investors and discussing this topic than any book, Web site, or psychologist. Watching what people do versus what they say has been a profoundly enlightening education for me. Much like raising children has been a profound education to being a better adult. It lets me see my weakness in doing the exact same things as the clients I worked with and educated. In the end, it is about what I want to accomplish and learning, honing, and perfecting the habits that allow me to achieve my goals financially. The greatest investment you will ever make is in yourself. Learn to manage you and not the market. You are manageable…the market is not.

By Jim Farrish, Founder & CIO, Jim’s Notes