In the world of business a partial quote thrown around is, “good plans shape good decisions”. In my 30 years of running a business I have used it myself on more than one occasion. In the investment/trading universe having a trading plan is used frequently, but rarely defined in terms the average person walks away with clarity on how to develop a plan. I have always been big on strategy development relative to investing my money. If I start with the strategy the plan tends to develop itself. If we go back to the article, “Purpose drives good habits for investing“, purpose is the foundation of our driving motivation to accomplish our goals. It would follow that strategy is the process for fulfilling and achieving our purpose. In fact, if I could be so bold, strategy development in its very process helps us identify, solidify and clarify our purpose. In other words the two complement and build each other to give us clarity and conviction of direction.
Strategic planning could then be defined as a process for identifying our purpose and core values defined through goals with a process that gives us every opportunity to achieve the stated objective. The ‘trading/investment’ plan then becomes our map that states where we are, and what strategy we will implement to get to where we are going. We all know when looking at a map their are multiple routes we can take to arrive at the destination, but our strategic plan will define which course works best based on our talents and beliefs to arrive at the stated goal. The map is your guide, the route is defined by your strategic plan and your purpose is what drives you to achieve the goal.
In today’s instant society the willingness to put in the upfront work of planning and defining our purpose, goals and strategy has in many ways been lost. We just want to get started. “Just tell me how to do it”, is the phrase I hear the most when teaching workshops on the how to’s of trading and investing. Individuals feel that planning and defining our purpose for investing is a waste of time… “I want to make money”, is the most commonly quoted response to the question: what is your purpose? I will be bold again and state, if that is your purpose you will be one miserable investor and you will always be looking for the perfect strategy, system, process, etc. for trading and investing your money. You will always be looking for the bigger better trading strategy (BBTS) because you will never be content or satisfied. Purpose driven money management is the most successful in my view. Money was meant as a means of exchange… not a destination. At its root, if your purpose is making money, how do you know when you have achieved the goal. I was once told by an economics professor in college, “the person who dies with the most money, still dies.”
Every day I start the trading day with a plan. The most recent I have been using to validate to myself that producing an income from my portfolio will support me in retirement. I am using the objective of making $500 per day without day trading. I have divided the money into three bucket strategies (strategic plans) to achieve the objective. Each strategy defines the entry, stop/risk, and target/goal. The purpose is clearly defined as $500 per day for retirement income. Because that is a clearly stated purpose the motivation is clear… retirement without worrying about sacrificing lifestyle. By having this clearly defined each day I look for investment opportunities that meet my purpose withing the defined strategy.
The management of each position is predetermined by the goal. For example, if two weeks ago I bought 500 shares of ABC stock for $35. My stated objective was to make $500 or $1 per shares. ABC is now up $2 per share. What do I do? By the way, that is a question we all ask ourselves when a stock moves up or down! Having a map/plan/strategy to achieve a stated goal/objective the answer to the question becomes much clearer and the decision process much easier. Sell half bank the $500 profit (goal) and set the stop at break even on the other shares and see how it unfolds. Worst case I achieved my goal. Best case it goes higher and we make more money on the stock that will offset any losses we may have on other positions that don’t work out. We could also keep all the shares and set our stop loss at the $500 profit and see what happens going forward. The decision is driven by the process, the strategy, the risk of the trade now not when I bought it, and achieving my purpose. Do you see the cycle and the clarity we gain by having done the hard work up front… determining our purpose for investing is the driver of each step and the ultimate motivator for how we achieve the goal… every day making $500 for a retirement lifestyle I want.
Taking this one step further, purpose drives the strategy, and habits drive the discipline to implement the strategy. This process of planning allows us to develop and define check list and other habit forming strategies that keep us on track to achieve our goals. For example, below is a list of five simple things I do every Sunday:
1) Put my attitude in alignment with my purpose as a reminder of why I am investing my money and willing to accept the risk the markets currently. I write my goal for the week and define what strategy I am going to use in light of the current market environment. I put my mind in the right perspective for what I am doing now relative to my portfolio and my risk.
2) Get Organized! That means reviewing existing positions relative to their original objective and what risk the current market environment presents and making the necessary adjustments. It also means addressing stops, targets, alerts and adjustments necessary to keep risk balanced in my portfolio. Establish my Watch List of opportunities the market presents this week based on my strategy to add new positions based on specific criteria laid out in my process.
3) Review where I am in reference to my goals for my portfolio. I break this down into, year-to-date, quarterly, and monthly results. Am I achieving my objective for my portfolio? Do I need to make any adjustments? Knowing where I am keeps me focused on the purpose of my investing.
4) Review my strategy which drives my processes, habits and discipline. Investor… know thyself! This keeps me in balance mentally to understand what and why I am doing specifically this week.
5) Anticipate any obstacles this week. Earnings, economic data, news events, support, resistance, or other points of interest that may develop. The best offense is a good defense. Anticipating or having an awareness of what could, may or might happen allows me to be prepared. Avoiding obstacles is easier than overcoming them in the heat of the moment.
I know you may be thinking this is too much work and I don’t have that much time or desire to do all of that to manage my money. If so, you really have to do some sole searching and determine if you are better off putting your money out of harms way, and letting it accumulate interest through the use of safer investments than stocks. There is certainly nothing wrong with that and I have encouraged many individuals to do exactly that. Don’t fool yourself into thinking that managing money is not time consuming. It doesn’t have to be all encompassing of your time, but it does take time and energy to manage your money properly and in alignment with your goals and objective to achieve the desired purpose. I would also warn that handing your money to an investment adviser takes time as well. You still need to manage the adviser. You want to review at least monthly and quarterly to confirm if the process is progressing according to the stated objective. Annual reviews are not enough as things can go wrong long before then.
Remember one important thing… IT is YOUR Money…. MANAGE IT! Accept the responsibility of having it and and being a good steward in the process. Allow your strategy for managing your money to better clarify your purpose behind managing the money for your lifestyle. The time you invest upfront determining this will drive how you go forward and the amount of time necessary to develop and implement the process.