The old adage that hogs get fat and pigs get slaughtered keeps coming to mind. As so many are celebrating the one year anniversary of the market bottom last March, the return numbers being quoted are amazing. Yes, some indexes were up 80, 90 or 100% over the last 12 months. This brings to mind 1999 when we saw similar returns. We know the end result of that story. And I guess we could go so far at to say that was different. But, the lessons of the story are still the same regardless of the implications of how we got here. To quote Warren Buffet, buy when their is blood in the streets and sell when there excess optimism. (my version)

I am in no way indicating the markets are overly optimistic, but I am saying a healthy dose of caution is advisable. As prophetic as we sometimes think we are, don’t confuse a bull market with brilliance. The markets were in extremely oversold conditions and they have snapped back. Now we have to determine how to benefit from the coming  opportunities and disappointments. In other words the easy money has been made, now we have o work at the process of making money and balancing the risk.

How do we manage our money looking forward? The same way we do regardless of market conditions or past returns. We start with a defined strategy of how to put our money to work. We measure risk/reward of every play and keep our eye on the goal. The “why” we are investing our money. Each of you has a defined ‘why’ and you should have a defined strategy for putting your money to work. If you followed your strategy you now have some solid gains in your portfolio as the market bounced off the recent lows. Now what? Remember risk management? Yes, it is time to evaluate the risk of each position relative to the market. If you have positions that are getting over extended to the upside manage the downside risk.

Entry, Stop and Target are the three pieces we have to decide prior to putting our money at risk. Have you hit the target? If so, did you follow your discipline? Raise the stop, sell part of the position? If you have hit the target and you have not made adjustments based on your strategy now is the time to do so. Giving back a profit is more psychologically damaging than taking a loss on a bad position. Adjust your stops according to your time frame and the current risk. Remember, you can always buy it back.

Money management is a process of implementing your strategy based on discipline. I am convinced this is true to enable us to manage the emotions and psychology of the process. If you know where your stops are set, you have peace of mind and can let your profits run. If you know what the target/goal is of each position you can mange the position when it achieves the objective. If you know what your entry point is for each position you don’t have to worry about missing the opportunity. There is power in knowing what you want and why. Step back evaluate and move forward with confidence.