If you want to be successful in investing, you have to have a well thought out plan. Developing a plan is not all that hard but keeping it during uncertainty times usually is. Below is a guide that discusses why it is imperative to establish a trading plan, the investment plans that suit your needs as well as the challenges you are likely to encounter when you fail to plan.
The benefits of a trading plan
By sticking to your plan despite the current trend, analytical forecasts and even opposing opinion, you will be able to establish optimal circumstances for solid investment growth. You need to develop your plan then focus on the objectives and long-term goals.
What you should avoid
There are three emotions that are usually accompanied by trading and they are fear, hope and greed. When the priced go on a plunge, your fear is likely to compel you to sell low even without reviewing your options and position. You should revisit and rethink your decision because should the prices recover, you will definitely be on the losing end.
Basing your investment on hope means, you could buy investment stocks hoping the company will perform in the future as they have in the past. In this case, you need to perform a thorough research on the company’s fundamentals in order to determine if they are worth the risk. If this is your only basis, you are likely to end up with overvalued stocks posing more risks than gains.
When it comes to greed, it can distort your rationale for investments. Greed can compel you to stick to an investments too long even when there is a potential chance of a major loss. If you keep on hoping that the stocks will go back up even as they continue growing, you will be on the losing end.
Key components of an investment plan
Investment objectives- The first thing you have to do is determine your objectives, which can be any of the three below.
- Income- If your plans are to establish an income stream, this is where your objective lies. Most of the investors in this category are usually low-risk with no capital appreciation requirement. They use all their investments as an income source.
- Growth- If you are focused on increasing the value of your portfolio over long-term, your objective is based on growth. In contrast to the one based on income, investors in this category strive for capital appreciation. They tend to be younger with a longer investment period. In case this is what you want, consider your investment expectations, your tolerance to risk as well as your age.
- Safety- There are investors who prefer to avoid loss as much as possible wanting to maintain their current portfolio value and avoiding risks involved in stocks.
Your main reason for investing is to grow your wealth but you still need to consider how much risk you are willing to take. If you happen to struggle with the volatility of the market, you need to focus more on the safety and income categories. On the other hand, if you are resilient and are willing to accept some losses, the growth category will be great for you. The growth category actually has more potential for higher gains but you still have to be honest with yourself about the level of risk you are willing to go through as you plan your investment.
As mentioned above, part of your investment plan is to determine your risk tolerance as well as your objectives but while you are at it, you need to determine how to allocate your assets in the portfolio. You also need to determine how they will match with your goals and the risk tolerance. For instance, if you plan on the growth category, you can allocate 60% in stocks, 15% in cash equivalents and 25% in bonds. You should make sure the asset allocation reinforces your risk tolerance and your objectives.
If you choose to go with the income category, you should focus on fixed-income strategies like lower rating bonds as well as dividend paying stocks.
If you put focus on growth, you can focus on common stock, mutual funds as well as exchange traded funds. Here, you need to be completely vigilant in managing your investments.
Choosing your own stock– In case you want to choose your own stock, you have to establish some rules about how to enter and exit your positions. One trading rule you should have is the stop-loss orders because they will protect you from downward price movements. Rule of thumb stated that you set an order at 10% below the purchase price in your long-term investments and at 3%-5% in your short-term investments.
You might also decide to invest in mutual funds and should this be the case, you should go with growth funds that focus on capital appreciation if your goal is to increase portfolio. If you want to generate more income, you should go with those that generate avenues like dividend paying stocks as well as bonds.
ETF’s and index funds- These are passively managed products and have low fees as well as tax efficiencies. They could be a good way to manage your asset allocation because they are low-cost and diversified.
The most important thing about reaching your investments goals is your investment plan. It will help you establish the right guidelines and a level of protection against loss. Base your plan on honest assessment of your investment style, objectives as well as your level of risk tolerance. Try to avoid letting emotions get in your way because they will influence your investment results.