The market is a volatile & tricky environment in which to operate. There’s no two ways about it. So, if you don’t have an Investment Plan that’s ready for EVERY possible scenario the market may bring, chances are you’re going to end up losing a lot of money.
Now, you can’t just wing it with your Investment Pan. Nor can you rely on your investing system to come up with it on the go, regardless of how good your system is.
Instead, you need a written down plan that represents a guideline for every action you take as an investor.
One that gives you the highest chance of charting a steady course to your long-term profit goals (there are no certainties in the market, sorry.).
Most investors understand having an Investment Plan as their guiding beacon can mean the difference between long-term success and failure in the stock market.
But, astonishingly, 95% of them never act on this insight.
So, today I’m going to show you how to go about creating an Investment Plan like the other 5%…
And skyrocket your chances of funding your long-term financial goals from the stock market.
A quick word of warning before we dive in:
You can’t create a good & actionable Investment Plan overnight. No, sir.
It takes time, discipline, and a willingness to ask yourself the hard questions. And that’s why most investors never go through the process.
But if you do, your efforts will be well rewarded in terms of profits and emotional stability.
With that said, let’s dive into it.
6 Sections Every Great Investment Plan Possesses… And How To Create Them
If your Investment Plan is lacking in any of the 6 sections I’ll break down below…
Consistency is going to continue to elude you. That’s because each section plays a critical role in helping you understand exactly how and when to act, regardless of what the market throws at you.
So, don’t underestimate any of the sections. And make sure to think long and hard before completing each one. Especially those that don’t sound “tangible” and make most investors omit them.
Okay, enough with the warnings. Let’s break down the 6 sections:
Section 1: The Vision Statement
In this section, you cover your “why.”
Or, in other words, the overriding purpose, motivation, and mission that drive your stock market investing.
Plus, you can use this section to decide the role of your investing strategies in relation to your overall capital.
An example is the Core Satellite Asset Allocation Framework, which helps you decide how much capital to attribute to passive and perceived less risky investments, and how much to use for high growth, higher risk strategies.
Now, this is one of the more “abstract” sections of the plan. But if you don’t carefully construct your “why,” you might find yourself lost in the short term…
Never being able to look at the Big Picture.
To avoid this scenario, carefully construct your Vision Statement today. And let it be the North Star of your investing actions.
Section 2: The Goals And Objectives Statement
In this section, you define your “what.” Which is aligned with your Big Picture North Star stated in Section 1.
More precisely, you must define 2 specific “whats.”
Your Return Objective
This is an obvious goal. One you should base on your long-term financial needs. And measure in annualized returns, compounded annual returns, or compounded annual growth return [CAGR].
Your Risk Objective
This goal is crucial for your emotional stability & well-being as much as it is for your profitability. That’s because here you define the maximum retracement of your portfolio equity curve. During its entire life.
In other words, how much you’re prepared to lose in the short-term, so you can profit in the long run.
Now, there’s a third “what” too. But unlike the previous two which will be different for everyone…
This one should be the same for every investor.
I’m talking about the “Skills” objective.
Here, you should aim to achieve and maintain a mindset of consistency.
(If you don’t understand why consistency is so crucial for every investor, I suggest you take a look at this article.)
Section 3: The Investing Method
Here you define your “how.”
Meaning you outline the strategy (or strategies) you’ll use to achieve your Return and Risk objectives from step 2.
This is where a DSS (Decision Support System) fits into your Investment Plan.
If yours has a verified Statistical Edge, that is sufficiently positive to not only be profitable but also beat the Total Return index…
Your chances of reaching your “what” skyrocket.
Section 4: Risk Management
In this section, you deal with market risk, sector risk, broker risk, and all the other risks that can affect your investing.
If you discover, through research of your Statistical Edge, and set clear boundaries (in line with your preferences) for each of these risks, you’ll no longer find volatility so scary.
That’s because you will have an excellent idea of how much your portfolio can lose in the worst-case scenario, before even entering a trade.
This takes the emotion out of the equation and makes following your pre-made plan much easier.
Section 5: Money Management
Here you decide how to allocate your capital across your portfolio(s).
Meaning you define exactly how much money to put into each individual trade, and your portfolio(s) as a whole.
In other words, you’re making one of the four most important investing decisions in this section:
How much to buy.
(If you don’t know what the 4 most important investing decisions are or their order of importance, check out this article.)
Section 6: Process Management
In this section, you’ll write down the exact actionable steps you will take on a day-to-day, week-to-week, or month-to-month basis. (The range depends on the DSS(s) you decide on in Section 3.)
This also includes measuring, journaling, paperwork, and doing anything else that’s necessary to ensure you stay organized. And keep executing & improving your Investment Plan.
Questions You Must Ask Yourself Before Compiling An Investment Plan
Okay, now you know what your Investment Plan must encompass and what it should look like. But you still probably have no clue how to start filling out those sections.
That’s where the 14 questions below come in.
If you answer them clearly, precisely, and without holding anything back, you’ll not only form the detail of the 6 Investment Plan sections outlined above…
But will also skyrocket the chances of your investing strategy being in line with your goals and desires.
Here are the 14 questions:
- The first question helps you answer the “why” question from Section 1. Basically, you must define if your portfolio is for growth or income. Or maybe both. And to fund what? A dream, retirement, family or other peoples’ necessities.
- Now you must dig deeper into how you plan to reach your Return Objective in Section 2. Map out the exact annualized return you’ll need from your starting capital, and over how many years to make your Vision a reality.
For example, a buy & hold index ETF investor reinvesting dividends would set a 9% – 10% annualized return goal over 10 years.
- The next question helps you define your Risk Objective. You do so by figuring out the worst outcome your portfolio is willing to accept. And start pulling out of losing trades.
For example, a buy & hold index ETF investor is prepared to weather a 55% to 82% fall in their portfolio value to achieve their 9% – 10% annualized Return Objective. (The NASDAQ100 fell 82% in 2007 to 2009).
- Next up you ask a strategy-defining question. Meaning you figure out the exact strategy you’ll use to anchor the highest probability way of getting you to your Return Objective.
To do so, you must look at what happened in the past. And research the chances of your strategy working in the future. All the while keeping in mind that even a high probability isn’t a guarantee.
For example, using a buy & hold index ETF strategy, you’d look at past decades of index performance to determine the probability of achieving a 9% – 10% annualized return over 10 years or more.
- As I’ve said, you must master consistency if you want to maximize the chances of funding your long-term financial goals from the stock market.
To do so, you must embark on attaining the necessary skills by defining the exact reading, training, and coaching to go through in order to build & maintain a consistency mindset.
- If you want to create the right strategy in question 4, you must also define the criteria and rules that must be in place when you buy or sell a stock.
You should also define an acceptable Win Rate for all the trades your strategy signals. And an average percentage win and loss per trade.
Your Win Rate and Payoff ratio will then determine if your DSS has a positive Statistical Edge, as explained in this article.
- Next you need to decide if you’ll trade in all or just certain market conditions.
To do so, you must set a clear and objective definition of each market condition and the boundaries between them.
- You must define exactly how many positions your strategy will manage. Plus, how big the position will be per trade.
Ensure these tie directly into the investing strategy you’ve opted for (which needs to generate enough Buy signals to meet your Money Management criteria).
- Another crucial thing to decide on is if you’ll focus on all the stock opportunities out there…
Or a fixed universe of stocks, options and/or ETFs?
If it’s the latter, how will individual stocks qualify? Define the exact criteria.
- Next, you should think about the nature of your DSS.
Will it be directional long-only, bi-directional (long and short) or non-directional where you will profit when the price remains stagnant for a period of time?
- Liquidity is another crucial factor to think about. Concretely, you must know the range of liquidity of the individual stock positions in your portfolio relative to the position sizes you will take.
And if the stocks’ liquidity will be high enough to ensure you can close the position when a sell signal occurs.
- You have a life outside investing too. Or at least you should have one.
So, it’s imperative you decide the exact amount of time you’ll spend managing your portfolio. Per week, month, day, whatever.
Just make sure you don’t stray too far off the amount you write in your Investment Plan.
If your Mission, Goals and Strategy (Questions, 1, 2 & 4) are aligned, then this time & effort factor should also align.
If it doesn’t then you will probably have to return to these Questions and start again!
- You need to know whether your brokerage rate is too high relative to your position sizes.
That’s especially the case if your strategy generates lots of small position sizes.
- Finally, note that you must answer the above 13 questions for each investing strategy you use.
That’s if you opt to use multiple strategies at the same time. If you do that, then you also need to make sure you answer this question:
“How will I allocate my capital across multiple strategies?”
The Next Step To Creating An Investment Plan And Boosting Your Long-Term Profitability Is On You — Take It Now
You now have everything you need to start thinking about and developing a sound Investment Plan.
So, “all” you need to do is act on this knowledge.
Go through the process and questions outlined above. Answer them honestly and create a baseline for all your investment actions.
Your bottom line and emotional well-being will thank you for it. Plus, you’ll get ahead of at least 95% of investors who never come close to answering even half of these questions before executing an investing strategy. At least not without mentorship or coaching.
Finally, if you encounter trouble on any step along the way to creating an Investment Plan that charts a course to your long-term success in the stock market…
And need someone to help you with this process and/or organizing your investing so you set yourself up for becoming a consistently profitable investor…
To your investing success.