Sunday, March 3

3 Types of Money Management – What are They and How to Use Them

Money management is a part of almost every adult’s life nowadays. Everybody needs to take control of their funds and know exactly how much they have and where they have them. This is not an article about money management for spending or anything like this. This article will focus on money management for investments and how they usually work.

We will talk about 3 types that are tried and tested and can find a potential user almost instantly. The reason there are 3 is that there are usually 3 types of investors. Let’s see what each of them does.

#1 Tactical

Tactical money management is what you would call active trading. It can be called day trading, scalping, or anything of the sort. This is when the manager actively moves his funds from place to place, trying to capitalize on small gains through various assets to land the most profitable trades.

These people can usually be found trading options on stocks, forex or cryptocurrencies. Anything that could potentially have high volatility, a tactical money manager is not too far behind.

Tactical money managers are also the ones using trading tools, indicators, and various other methods to help them with finding perfect opportunities. For example, in FX trading, a tactical money manager would always adhere to the principles of risk/reward ratio in forex trading and how to utilize it to its fullest potential.

This is how they usually calculate. Let’s say that you want to use $100 in order to make $200, this would mean that your risk coefficient is 1 and your reward coefficient is 2. In total, your risk/reward ratio is 2 because 2/1=2.

However, the real world has much lower numbers than these. Oftentimes the risk-reward ratio is much lower than a coefficient of 1. Usually, it’s 0.5 or even 0.1 based on the asset.

Therefore, tactical money managers usually risk a lot more than they receive, but through thorough research and diligent tracking of market performance, they can afford to make these risks and often do get their rewards at the end of the day.

However, this type of money management is not recommended to anybody just starting out in the financial markets.

#2 Strategic

A strategic money management system is pretty much how it sounds. It determines the perfect strategy to stick to for a little while. This type of money management is often more long term than the tactical one. Most people like to call this the cyclical money management system.

For example, let’s say that you are investing in bonds. In this case, you will most likely be using the strategic money management system. And what usually determines the performance of bonds? The economy, politics, and the current administration running the country. Let’s say that you are from the United States.

You are participating in bond trading would likely require you to consider the actions of the Trump Administration and make trades based on that. However, you are fully aware that this strategy may not be as effective in 4 years as there is going to be an election of a new president.

This new president may change the bond market completely based on what reforms he or she is going to make. Because of this, the strategic money management system always follows a cycle, be it a presidential administration or just various seasons. It all depends on what a person is investing in.

#3 Passive

This money management system is also self-explanatory. It follows a very predictable pattern among almost all who use it. Usually, passive money managers just find the biggest and most profitable companies they can find and invest their money in their stocks. These companies would usually be called blue-chip stocks, simply because they can never fail. Even if they experience a downfall, it’s almost guaranteed that they will continue growing no matter what.

What passive money managers do is sacrifice profits for safety. Investing in blue-chip stocks is a very long term strategy, sometimes in the decades. Most people deposit huge amounts in these stocks and then wait until they retire to cash it out and live based on that.

This may be the least exciting money management system, but it seems to be the most successful one so far, at least for American investors.

It’s as easy as that. As long as you can determine how much time you would like to dedicate to your money management, there is most definitely going to be a strategy for your taste. And it’s not like these strategies cancel each other out. A trader or an investor can very easily just migrate over from one to another. It may sound quite easy, but it’s essentially what it is.

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