One of the best articles ever written on managing your bankroll..
Originally published in Sports Insights..
Money Management and a “Good Defense”
Most of us focus on betting systems and strategies that will be profitable. After all, without a good betting system, we won’t make any money, right? The same thing can be said about “money management.” That is, if you don’t pay attention to money management, you might not be able to take that “next” step to becoming a “sports investor.” Good money management will reduce the chances of extreme losses and help turn this “hobby” into a legitimate “investment.”
In the world of finance, many professionals use the phrase “risk management” and “money management” interchangeably. What are we trying to do when we focus on “money management?” In simple words, we’re trying to “manage our money” – or “manage our risk.” Our goal is to preserve our capital or hard-earned money. We want to minimize the chances for loss – or in a larger sense, minimize our “risk of ruin.”
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First things, first… We believe that “flat” betting is the way to go. That is, bet the same amount for each play. “Chasing” or increasing bet size based on your last bet (or series of bets) is not recommended. (This is true for most people; please see * Note * below.)
Over time, you may hear about various systems where you increase your bet size “knowing” that you are due to win sooner or later. In general, these systems don’t work. Eventually, a bad streak occurs and you are betting a recklessly large amount to re-coup losses.
In general, many of these approaches MIGHT seem to improve short-term performance – BUT at the HUGE expense of increasing your risk of ruin. A bad stretch could endanger your bankroll fairly quickly. If you DO succumb to the charms of various Martingale systems, please use some sort of systematic risk management method. In this business of sports investing, it pays to minimize your risk of ruin.
Professional money managers – as well as sensible sports investors – will agree that you should minimize the chances of “blowing out” your investment portfolio. Flat betting will help you to “stay the course” and ride the ups and downs of investing.
* Note *: Experienced gamblers might use a variation of a Martingale or “chase” systems – but will always have some sort of risk control in place. This is beyond the scope of this article but might be addressed in a future article on money management.
Next, you should think about the type of investor that you are. Are you aggressive or conservative? Are you experienced or a novice? The answers to these questions will help you to determine the size of your typical bet. This is called your “unit” size.
We typically recommend that a sports investor bet 1% – 3% of their bankroll on each bet. Conservative sports investors (or beginners) should bet 1%-2% on a play. Note that professionals are normally in the 1% range.
Aggressive sports investors might want to bet 3% on a play. 2% is a good medium; it allows you to withstand a losing streak while helping to build up your sports investing bankroll. Very aggressive investors might bet 4% or 5% of their bankroll on a bet, but this is too risky for most investors.
Why not 4% or 5%? The short answer is: Streaks and the risk of ruin. If you bet amounts that are too large, a bad streak could cut your bankroll in half (or worse). You then might feel like you need to reduce your bet size – just before the inevitable hot streak. Smaller bet sizes are more prudent and allow you to stick to your approach and stay disciplined.
“True” Bankroll and “Risk Capital”
Whenever we talk about percentages of bankroll, most casual bettors feel that they are on the “high end” of the ranges we discuss. This might SEEM true – but only because the “true bankroll” for most casual bettors is higher than what they have in their accounts. That is, many bettors might have $X in their accounts, but are willing to add another $Y if they draw down their account. Professionals normally already know their “full bankroll” and need to preserve their “capital” versus “risk of ruin.”
Investors – and in this case, sports investors – need to understand the level of their “true bankroll” or “risk capital (allocated to sports).” Once investors take a serious look at their finances, they might better understand the “true” level or amount they allocate to sports investing. They might then realize that 1%-2% of their “true bankroll” or “risk capital” is indeed a realistic bet size.
Summary: Money Management and Playing Defense
In essence, good “money management” is a lot like playing good defense. Money management will allow you to “stay in the game” during tough times so that good handicapping strategies (your offense) can put you ahead.