It’s the time of year for resolutions. Let’s make some for our investing.
Why? Because many investors found that 2015 was a difficult year, and 2016 has already gotten off to a really rocky start. These resolutions will help everyone be able to withstand trying times and become better at the craft of investing.
No matter what your investing approach – growth, dividends, value – these resolutions should help you.
1. Make a plan
This is the obvious place to start, but many investors never do it.
No matter what your investing philosophy, having a plan will make you better at it. My business background taught me the importance of planning.
Envision your investing as running a small business. You are the founder and CEO of that business. Every well-run business has:
- a primary goal;
- strategies designed to achieve that goal; and
- tactics, programs, and activities to execute the strategies.
Those are the essence of an investing plan. You may need to do some soul-searching, but at least resolve to make the first few baby steps to figuring out what you think about investing and writing them down.
As a self-directed investor, you are not bound to a particular investment style. You don’t have to report quarterly or annually to anyone except yourself. This means that you can tailor your investing specifically to your own needs. Take advantage of that freedom. The first step is to start with a plan.
2. Settle on your goal
Yogi Berra said, “If you don’t know where you are going, you’ll end up someplace else.”
Your goal is personal to you. Do you want to invest for maximum wealth? For optimum income? Something else?
Whatever it may be, resolve to figure it out. You may have multiple goals, or you might wish to list a specific target like funding your child’s college education. Maybe you want to set up multiple portfolios, with each designed for a different purpose.
Write your goals down. They will become the reasons that you invest in particular ways rather than others, and in each case you will know why you are doing what you are doing.
3. Create realistic strategies
Part of your planning will be to create strategies to meet your goals. Resolve this year to create ones that are realistic for you.
This means that your strategies must be ones that you can actually follow.[ad#Google Adsense 336×280-IA]If you can’t stick to a strategy, then it’s useless for you.
You will achieve better results over the long term if you know your goal, have developed strategies to meet that goal, and follow them.
If you can’t follow them, something needs to be fixed.
Even great strategies will falter from time to time.
There is no perfect strategy, and when an investing approach is struggling, there can be a temptation to abandon it rather than see it through.
Stay focused on the long term.
Don’t be an investor who gets buffeted by market conditions and hops from strategy to strategy, always chasing the hot approach instead of executing a realistic strategy well.
4. Focus on process
Your process is the only thing that you can control when you invest.
Pilots work through their pre-flight checklist before every flight. Professional golfers follow their pre-shot routine before every shot.
That’s the approach you should take to investing. Develop a checklist of factors that you will consider every time before investing in anything. They may not be rigid rules – guidelines are fine – but resolve not to buy any stock without running down your checklist before pressing the “Place Order” button.
By the same token, know why you would (or wouldn’t) sell every stock that you buy. The time may come when even long-term holdings should be sold. Know how to identify those times. Again, they may be guidelines instead of rigid rules, but establish them.
5. Value before you buy
Speaking of process, resolve to value every stock before you buy it.
Valuation is connected to price, but it is not the same thing as price. Learn the difference. Value is the comparison of price to the actual value of what you are buying: It’s a ratio.
It’s like getting a house appraised. Some houses are over-priced, some are under-priced, and the rest are about right. You want to buy stocks when they are under-priced, or at worst when they are fairly priced. You never want to pay too much for one.
Here is a primer on valuation: Dividend Growth Investing Lesson 11: Valuation.
I generally buy-and-hold, but that does not mean buy-and-ignore.
Set up a schedule for formally running through your investments. I do it twice per year. Many investors do it quarterly. Do it even more often if you like, so long as the higher frequency does not seduce you to trade too much because of the emotions that come from watching things all the time.
Whatever schedule you decide on, do it. That’s when you will check your holdings against the selling guidelines and other factors in your plan.
Note that these periodic reviews are not meant to spur actions necessarily (like selling), but they are meant to spur decisions. Holding is a decision just as much as buying and selling. The goal is to know what you own, why you own it, and whether it is still fulfilling the reasons that you originally bought it.
7. Be businesslike
It is always a shame to see an investor who, despite their best intentions, ends up letting emotions rule their investing. They end up making bad decisions, jumping into and out of the market at the wrong times, and generally messing up their own plans.
The antidote is to resolve to take a businesslike approach. Plan your work and work your plan.
Many investors – even successful professionals – find this hard. They somehow leave their well-developed business skills at the office and go to pieces when they are considering their own investments.
There is no magic formula, but making a resolution to be businesslike is a good start. When you are in a pressurized situation, remember your plan. Go back to look at it. It will remind you of how you thought about things when you were not reacting emotionally.
Being businesslike includes thinking. You don’t have to be rigid about your plan and the strategies in it, but remember that you created them as a roadmap to reaching your own goals. They are there to help you, not tie your hands.
Resolve to slow down a little in your decision-making. That gives you a chance to think rather than just react. Don’t let short-term events, like a 300-point drop in the Dow, lead you to snap decisions that undermine your long-term goals.
The more you treat your investing like a business, the more businesslike your results will be.
8. Be diversified
It is said that the only free lunch in investing is diversification.
Diversification protects you from “the big one.” Investing involves making bets on unknown outcomes: You put down money now in the expectation of making more money in the future, but success is never guaranteed.
Spread those bets around. While you may concentrate on a particular type of investing – as I do with dividend growth investing – spread your bets around within that general style. Instead of having 50% of your outcomes riding on one bet, lower that to 20% or 10% or 5%.
In a 5-stock portfolio, 20% of your results will come from each single position. If you increase your portfolio to 20 stocks, only 5% of your outcome depends on each one. There is a measure of safety in that.
Everyone has their own comfort level, and you must find yours. But in general, being at least somewhat diversified is better than having all of your eggs in one basket.
9. Don’t panic
The truth is, unless you are being chased by a wild bear, panic never helps. No one ever made a better investing decision because they were in a state of panic.
Learn what makes you panic and how to cope with those situations. Do you hate it when the market averages all fall 2%-3%? Maybe you should turn off the TV so that you don’t even know it while the market is open. Don’t like it when you hear about more turmoil in the Middle East? Think about it rationally: Does that really matter to your long-term investing strategy?
The idea is always to make good decisions. Many self-directed investors sabotage themselves by being over-reactive to market events. The typical pattern is to sell when the market is falling (selling low), then failing to get back in until it is too late (buying high).
Try to think about these situations rationally instead of emotionally. Maybe you should select a strategy that is inherently less dependent on favorable market outcomes for success. That is why I am primarily a dividend growth investor. The whole approach is far less dependent on market action, with the result that, compared to years ago, I literally don’t care. When the market crashed in the first trading days of 2016, my income didn’t change at all.
Big market volatility can make anyone nervous, but direct that energy to good use: Think better, rather than letting emotions take over and drive you to make bad decisions.
If you sell during a market panic or bear market, you will lock in your losses. Think hard before you do that.
10. Revisit your plan
Review your plan once a year, if not more often. The beginning of the year is the perfect time to do it. That’s when I review mine.
Your plan is like your constitution. Its intent is to be permanent, but it can be amended. Maybe your life circumstances changed: You had a baby, or your last baby graduated from college. Maybe you got a new job or retired.
When life circumstances change, your investment objectives, resources, and methods may all change too. Rather than make repeated exceptions to your plan, change the plan itself. That will force you think through the new issues so that you can articulate them for your plan.
The exercise means that you will understand them better and be a more confident investor.
Review your plan tonight! If you don’t have one, spend an hour or two getting started on one. It certainly can’t hurt, and it will probably really help your investing. When next year rolls around, you will be glad you did it.
— Dave Van Knapp
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