Money management and risk quantification

Suppose I earn $x/yr and have a total savings of $y. Suppose I have expenses $z/yr. A good rule of how much you should invest in cash, stocks, bonds, home, or whatever is that you should think of your needs $z/yr first! Your $y is reliable but your income $x is not. A conservative estimate is that you should at least keep one year's expenses in cash savings. So, first you should stash away $z from $y in a secure in 4 rolling CDs: (1) z/4 a 3 month, (2) z/4 a 6 month, (3) z/4 a 9 month, and (4) z/4 a 12 month. You need to keep renewing them as they mature. So, at the end of 3 month period CD#1 will be placed in another CD of maturity 1 year so that you will have 4 staggered CDs. Try to get as good a deal on them as you can - usually online banks such as ING are better. If your job is absolutely secure then you may not need this much protection and a 6 month's expense may be enough. Now, what you need to do with regular income $x? Every month government gives you approximately 30% return on a part of your money if you deposit it in a 401-k or 403-b account. That is really good deal. So, if ($x-$z) has enough money to max out, say $w/yr, on the 401-k go for it. Check IRS website for the upper limit of your contribution or ask the human resources officer at your workplace. You can get the money deducted from your paycheck and deposited directly in some investment account that your employer is supposed to help you set up. Usually the firms allow you to invest in only mutual funds. Best way to handle this investment is to use broad index fund such as SP500-based index or Russell6000 based index. Put roughly 1/2 in US equities 1/4 in Europe and 1/4 in Asia. You need not look at the return till you are 10 years from retirement. At that time you can start moving 10% each year into bond funds, most liely Tips. When you are done with these you will have $(x-z-w)/year as saving. So, your left over bank account $(y-z) will be growing from your saving #(x-z-w)/year. Of course as your x increases, your z and w will also. So, what are you supposed to do with this growing pile of money p = $[(y-z) +(x-z-w)]? This is a real problem for most working people. They already have their job to worry about and they do not have time to day trade with this money. Neither do they have time to start a business with this money. Many people just leave the money in bank savings account. Some others try to leave them in mutual funds. Some others try to play the wall street Russian roulette - some times they win some times they lose. As the money $p grows one gets more impatient with trying to find a way to make use of it. Maybe donate some of it to good causes. Of course some of this money will be used in the time of retirement or maybe towards expanded expenses z some year.

How to manage extra money $p? Note that if $p were to suddenly vanish it will not affect your life one bit. In that sense $p is really an extra something in your life and it could be used to speculate at least conservatively to grow it at as reasonable pace as possible. We would like to grow it judiciously so that we can pass it on to a good cause or our children or use it in our old age. It turns out that whether your are conservative or aggressive on average you cannot expect to grow money much in excess of the market or economy as a whole. And with the demands of our jobs we really do not have time to follow the market too closely. May be we can spend 1/2 hour each night. So, what should we do? Stock market perhaps is the easiest financial vehicle to utilize for growing a pile of money. I have a reasonable suggesstion how to do that based on the observation that market signals are not always clear cut. The stock market is either trending up, trending down, or vacillating - neither trending up or down. There are many ways to tell these, but a simple trendline on DAILY CHART OF 1-YEAR period is sufficient to tell trend. One can draw the support and resistance lines and pretty much know that there is a trend going on or not. But sometimes one is not sure. Sometimes one is only partially sure. Thus , there are five results we come up with - (1) definitely up, (2) probably up, (3) probably down, (4) defintely down, and (5) can't tell. These are five decisions of how to allocate money in the market. Therefore, let us divide our money into two parts (p/2) + (p/2) and use broad index to invest. SPY and SH are good enough vehicles. We don't need leverage. Depemding on the trend of the market we buy or selll 1/2 position of SPY or full position of SPY or half position of SH or full position of SH or remain outside the market. That way you will be using all of $p and you will get most of the up trend and most of the down trend. Your return should be more than simply using SPY of you do it right. Now, the main question is how to tell the trend. Draw trend lines and do not doubt yourself is the way to do it. But your trend lines will depend on the period you take - 1 year or 3 year. Probably 1 yr daily is good enough. If you try smaller periods then you can catch faster trends. You may also try resistance and support horizontal levels for your decision. In that case it does not matter what period you are looking at. But whatever period you choose, stick with it. Most people get confused because they are looking at different periods in different websites by different people. I like the one-year period for both looking at trendlines and support and resistance. I hope money management will be useful to you.