The money management system is usually a systematic way of planning and involves setting and monitoring a budget for the investor’s portfolio. The goal of the money management system is to create and maintain a balance between the money flow into and out of the portfolio. The purpose of the money management system is to reduce the risk of loss, increase the capital appreciation, and increase the rate of return. The money management system also serves as a safety net when investments fail.
A portfolio is composed of various investments, all of which are diversified into categories that may include stocks, bonds, mutual funds, real estate, commodities, options, and foreign exchange. Many investors also include a money market or a bond fund. A common mistake made by new investors is purchasing the entire portfolio at once. An investor must purchase individual securities or small amounts of securities with an emphasis on higher quality.
The portfolio may include both equity and fixed income portfolios. Equity portfolios are comprised of securities issued by corporations, government entities, or institutional organizations. Fixed income portfolios are typically bonds issued by governments or by banks. The goal of the equity portfolio is to generate a steady income, while providing a security for retirement funds or savings.
The investment portfolio should be designed to provide a stable and predictable rate of return. Many investors find it difficult to determine the rate of return, because it varies from day to day depending upon the market and the economic situation. Therefore, they often resort to a random portfolio, such as the portfolio of stocks, which varies only a little in each day. Random portfolio may be appropriate in some circumstances, such as those that have high probability of a large return. However, random portfolio is not appropriate for all situations, such as those that involve a smaller probability of a high return.
A common mistake made by new investors is investing large portions of their portfolio at the beginning of a portfolio, then withdrawing that portion in the middle or at the end of the portfolio. This practice leads to a loss of money in the beginning stages, while the investor gains cash in the latter stages. Therefore, it is recommended that an investor carefully monitors the progress of the portfolio, taking advantage of all opportunities to earn a profit before withdrawing those portions.
In a fixed income portfolio, an investor typically invests in bond and certificate of deposits or fixed income securities, but may also invest in other types of financial instruments. Some of the more popular securities that are included in fixed income portfolios are treasury bills, treasury notes, mortgage backed securities, certificates of deposits, and stock certificates.
The investment system of a portfolio is based upon several factors, including the return expected from the particular investment. A good investment system can be used for any investment, including the investment of money, real estate, or commodities. An investment plan will work best for investors with a long term goal and reasonable expectations of returns. Many investors, however, use the systems to make initial investments to develop a portfolio that will yield a profit, and then withdraw those portions of the portfolio at the end of the investment.