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To quote Linda Bradford Raschke, “Goals are something that can be continuously updated and should be reviewed everyday. KNOW YOUR GOALS. Have a plan….You will always have your best odds of success in achieving your outcome if you have a written down Plan”.
Practical and wise words but evidence suggests that when it comes to the market only a small percentage of investors ever get pen to paper. Instead, the gross majority find themselves forced into making illogical, emotional and reactive knee-jerk decisions because of a lack of a written plan. Therefore, inconsistency, subjectivity, hesitation and uncertainty dominate decision making.
To me, investing should be viewed as a business that requires self-control, process, persistence, patience, objectivity, edge, discipline, desire, curiosity, consistency, confidence and attention to detail. A Plan and the trust to follow your plan can help you achieve all of the above. In the process you become an overcomer, an overcomer of doubt, fear, frustration, hesitation, uncertainty
You are in effect the CEO of this business. Your success or failure will be a reflection of your decisions which will result from the execution of your Plan. As the CEO of your business, the buck stops with you!
I’ve spoken about this subject many times on this blog but I also know that investors need constant reminding and motivation to either put to paper for the first time or to revise and update their current Trading Plan.
So I make no apologies for covering this subject again. If I can inspire just a handful of blog readers to do either then this blog will have been worth the time in writing and publishing. More than a handful would be better but I am also realistic about how apathetic people can be when it comes to doing tough stuff like this because they want the ‘quick fix’, somebody else to do it for them or they are just “too busy” – i.e. there are perceived, or self justified, higher priority more important things to do.
So where do you start? Each section of the Plan is important but the first two are the most important and probably the two that attract the least time and effort by investors.
- Mission Statement
This is where any good journey starts and it deals with the question, WHY? This is about PURPOSE. This purpose will create desire and drive to stay on the journey.
- How does it fit in with your life mission statement?
- Are you doing this for your family?
- Your retirement?
- Your children’s education?
- Are you doing this for a worthy 3rd party cause?
- Are you doing this to achieve skills for a career change?
- To achieve financial freedom so that you can spend your time on a cause?
- Is it for capital growth or income or both?
- Goals and Objectives
What are your financial trading and investing goals and your investing skills goals? This section deals with how much and WHAT and should detail specific periodic goals.Specifically you state here what your return objectives are and what your risk objectives are.
- What returns do you expect to make that are aligned to your mission statement?
- What risks are you prepared to take to achieve these returns?
- What is the maximum risk you are prepared to take before shutting down a portfolio?
- How much time do you have to give your business?
- How much money do you have to invest?
- Will you invest all my money into one strategy or will you use several?
- How much risk will you take on each strategy?
- Will you use leverage or not and if so, what effect do you expect to make on returns and risk?
- Which markets and instruments will you invest in to achieve your return objectives?
You also need to state your skills goals:
- Do you just want to follow broker and newsletter tips or do you want to advance your knowledge and learn new skills? If so, which skills do you want to develop and what steps are you going to take?
- What are your mindset goals? You’re certainly going to be challenged throughout your journey and what mental skills will you require to handle this mentally?
- How will you address acquiring these skills?
- What strategy or strategies are you going to execute?
Are you going to shoot from the hip or are you going to develop or acquire a strategy to follow and trust? Does the strategy fit your stated return and risk objectives from the previous section.This section details HOW you are going to achieve your stated objectives and you mission statement. It answers the questions:
- What criteria will I use to decide what instrument(s) to invest in in any given period?
- What criteria will I use to decide to enter a position in a given market?
- What criteria will I use to decide to exit a position in a given market?
- Risk and Money Management
This section identifies all the risks that you could encounter and then answers the questions of how to manage each of these risks. Risks also include trading environment such as your computer, power, software. The bigger risks have to do more with your capital and the market related risks such as:
- Market risk and sector risk.
- Liquidity risk.
- Volatility risk.
- Trade risk, etc.
The risk management criteria and rules specified here should address how to remain within the stated risk objectives you have set in the Goals and Objectives section.
Money management deals with how much capital to place in any given strategy and then within any given position within that strategy.
Whilst risk and money management principles will be similar from one strategy to the next the actual rules of how much to apply will differ from strategy to strategy depending on how good an edge the strategy has and how much leverage it uses.
- Process management
This section details precisely when and how the Plan will be executed. What will the regular routines be that allow the Plan to fit in with all the other things going on in your life?
- How will I measure if my business is a success?
- Do you have a performance bench-mark? If so what is it?
- How often will I measure my performance?
- Is the time I invest managing my money a fair reflection of the returns that I am achieving?
- If I fall short of my return objectives why has this occurred? Because I didn’t follow the processes correctly or because of systemic differences to what was expected?
- Did I exceed my maximum risk objectives? If so, why?
- What will I do about?
- Having a plan and benchmarks allows one to conduct skills gap analysis. Filling that skills gap feeds back into the skills objectives in the Goals and Objectives section.
Failure to meet ones objectives is merely feedback on what development one needs to improve. The investor with PURPOSE and desire will find a way. The investor without purpose and desire will fall by the way.
Formulating a plan for managing money in the market is akin to writing a business plan. It is a MUST. I’d encourage you to immediately write your very own trading plan that will outline how you will approach the market. For those that already have a Plan, pull it out of the bottom draw and measure how successful you have been in adhering to it. All too often we file away our plans and only revisit them at times when someone writing a blog reminds us to! Our Plan should be most needed when we are most challenged. If it doesn’t help you make decisions when times are tough then it is simply not complete. Make sure you complete it!
To ensure that you stay the course – keep your Plan on your trading desk.
The market has been showing lots of positive signs since January. Volatility has reduced greatly and some fantastic trends have emerged in certain sections of the market.
For SPA3 users, we’ve been in a Low Market Risk period since the 13th of January 2012. Our Plan has guided us and allowed us to expose our money to the recent rising market providing SPA3 portfolios with returns in the order of 12% whilst the All Ords have risen just 2.5%.
When (not ‘if’) the market does at some stage turn and head lower, our plan will dictate exactly when we will reduce our exposure by removing our money from the market, even to 100% cash. This is the ongoing cycle of the active investor that has a Plan.