The old saying is very pertinent when it comes to investing.
Do you have a trading or investment plan? If not, then I assume you've never heard this saying...
"If you fail to plan, you plan to fail!"
When I say "a plan" I don't mean a rough idea of the kind of stocks you're looking to invest in; I mean a trading or investment plan as a set of rules that tell you what you should do (consistently) in various situations. A good plan will have rules that cover things like:
- Which markets you will trade, or companies you will invest in.
- How much money you will allocate to each trade or investment.
- What you will do if the price goes down, or up.
- Whether you will use stop orders, and how.
- How you feel about leverage.
- How you will know when to sell a stock or close a position.
Well, you get the idea, and now I'm going to share with you my plan, which is something of a trading-cum-investment plan that fits my style of position trading. Obviously it will sound more impressive if I call it "The Master Plan".
The Master Plan
My plan consists of a number of rules or axioms as follows. Your own plan will (and should) be different depending on your particular expertise, time frame, and trading or investment philosophy.
What to Trade: I will trade only individual equities; no indices, commodities or currencies.
When to Invest: I will invest on market weakness, in stocks which have suffered a short-term price shock but which have good long-term potential.
How to Trade or Invest: I will trade via tax-friendly spread betting, ISA or SIPP accounts where possible.
Position Sizing: I will start each position with the minimum allowable spread bet size or the smallest traditional investment that is cost-effective, with a view to pyramiding a larger position over time.
Stop Orders: When the total loss of my position is acceptable, I will not use a stop order to limit my loss, but I will deploy one as soon as it is possible to lock-in some profit. When my position size implies too much risk, I will reduce the risk to an acceptable level with a stop order.
Pyramiding: I will pyramid a position by making an additional investment only when (but not merely because) my locked-in profit exceeds the new risk.
Diversification: While restricting myself to mainly UK equities, I will aim to hold many separate positions so that no single company-specific adverse event can wipe me out.
Averaging Down: If I am ever tempted to 'average down', I will do so with less risk each time by making smaller additional investments or by placing same-size spread bets at lower prices.
Use of Leverage: I won't take leveraged positions explicitly, for example using options or 2 x ETFs, but where leverage is implicit (e.g. spread betting) I will reduce my position sizes accordingly and / or keep sufficient cash on deposit to cover my true risk.
When to Sell: I will never sell out manually except to partial-close a position at the top of a swing while leaving the remainder to run for higher profit. Positions will be closed entirely by my profit-securing stop orders.
That just about covers my trading-cum-investment plan, but I can't help wondering if I'm giving the game away. I mean, this could be the Holy Grail that you're all looking for, and I'm giving it away for free! But I think I'm pretty safe because despite the very wide readership that The Motley Fool enjoys, it's a small proportion of the overall market and probably insufficient to move the market.
Of the entire readership, some of you (not YOU, obviously) won't read this article. Of those who read the article, maybe 50% of you will dismiss my trading plan as not the Holy Grail you're looking for. Of those who remain, some of you won't follow my plan properly to the letter, and some of you will lose faith somewhere down the line... probably just before it comes good.
In a nutshell, I'm pretty safe ground in sharing my sure-fire route to riches! (tongue firmly in cheek)
I'm not going to ask YOU to share your trading or investment plans here, just in case you do give the game away. But I am asking you to consider whether you do have a plan. I mean, you're not just "playing [the investment game] by ear" are you?
