To be a successful investor or trader, a written investment plan is a must! In fact, most broking firms will not allow its professional traders to trade money without a trading plan!
Each and every trader must submit their plan and have it approved to be able to start trading money on behalf of clients. The trader is then judged and compensated for how well he follows his own plan and how well he does financially. If he violates his own plan, he may be subject to immediate dismisssal!
So it’s crazy for us non-professionals traders to start trading without a plan, especially when things don’t go our way, and they won‘t always go our way, you can be assured of it!
Now, before we begin to write our plan, take just a moment to think about your true investment objective. What do you want to accomplish with this trading account? Simply saying “ I want to make money” is not an investment objective. You have to have a specific objective, like, “To outperform the All Ords by at least 10% annually”. That’s an objective.
Then you must decide what type of industry and sector of shares you are going to invest in. The energy sector, the housing sector or the retail sector are unlikely to outperform the All Ords. That means you might have to look at the more volatile, but more rewarding sectors, like the computer sector, telecommunications, etc. This will likely give you lots of volatility in your portfolio and you’ll have to accept it or don’t get involved in that sector in the first place.
There are 7 necessary ingredients in your investment plan:
Reasonable investment objective
What growth factor do I want to achieve? Be realistic. Are you actively trading or long-term investing?
Risk tolerance statement
What industries, sectors and types of shares will I invest in?
Diversification plan
How many different types of companies do we buy on average? Between 10 –20 should be a maximum.
Price range of the shares we buy
Do we buy $30 shares, or only the sub $10 shares? Do we invest only in Australia, or overseas too?
A defense strategy
How much price decline are we willing to accept? Be sure to use a Stop-Loss!
Contingency / Repair plan
What do we do in a potential large market correction? How do we prevent and/or repair large market losses?
Timeframe
How often do we, or will we, re-assess our investment strategy? It should be reviewed every 3-6 months and updated if and when the market conditions change.
To help tailor your investment strategy, try asking yourself these questions:
Do I usually average down in price, or do I take a small loss?
How many shares do I buy and sell everyday and do I diversify well?
What is the usual size of my trades? 500 shares, 1000 shares, or even more?
When do I take my profits? When I’m up 10%, 20% 50% or more?
If I have a profit in a stock, do I hold it overnight?
When you have considered all the above aspects, you will be well underway to finalising a very valuable and effective investment plan.
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