Part 1 – Part 2 – Part 3 – Part 4 – Part 5
Complete Investment Strategy
If you look at any successful investor, they have developed a complete investment strategy. They would never invest with a haphazard, one-off, ‘let’s see how this turns out’ approach.
In fact the opposite is true. Savvy investors follow their comprehensive, detailed, soup to nuts investment strategy with fervor.
In Part 1 of our 5 Habits of a Savvy Investor, you learned how important it is for an investor to lay a firm foundation. This means you make investing a very personal endeavor.
You know who you are as an investor, what your investment philosophy is, and exactly what you need your investments to do for you.
Your investment strategy is what allows you to put the reasons or the ‘why’ behind your investing into action.
Let’s look at the five key elements of a successful investment strategy.
Investment Criteria
Your investment criteria allow you to describe and identify the investments that are most suited for who you are and what you hope to accomplish as an investor.
For example, have you decided whether you need an investment that produces spendable income or one focused on growth over the long run? What level of risk are you looking for?
The answers to these questions (and many more) will serve to define your investment criteria. Subsequently, your criteria will lead your investment.
In other words, your criteria are the link between your investment philosophy and your investment method.
Keep in mind, this piece of your strategy is not only about determining the specific search parameters you will use, but also, the system you will to find investments that have the greatest potential to meet your criteria.
For example, the primary goal of the Snider Investment Method is to generate income.
To do that, we invest in stocks and options – and of course, we have specific search screens and guidelines we follow to find positions that have the greatest likelihood of helping us achieve our goal.
Entry Plan
After you use your investment criteria to identify your investment, the next step is simply to buy it. But keep in mind, not only should you always know what you are buying and why you are buying it, you must also take careful consideration of other factors like pricing (how much you will pay) and timing (when you will buy).
For example, in the Snider Investment Method, our trading cycle is based on options expiration. Typically, options expiration is the third Friday of each month, and because of that, we trade the Monday after options expiration.
This specific timing is part of our plan for maximizing the monthly income we make through option premium.
Portfolio Structure
Part of your complete strategy is pre-determining how each investment fits into the entirety of your portfolio. What percentage of your total assets will you set aside for a particular investment?
The goal of portfolio structure is to use a system for allocation and diversification that enables you to manage risk and create consistent performance. This is where you step back and look at the big picture of how to maximize the efficiency of your portfolio.
Exit Strategy
After teaching literally thousands of people how to invest, I can tell you that most people have a pretty good idea about when to buy an investment, but very few have any idea of when to sell. If their investment goes down in price, they start to panic and feel compelled to sell even if it results in a big loss.
If the price goes up, they’re not sure if they should go ahead and pull the trigger to sell or wait and see if the price goes even higher.
These strong emotions lead one into trying to time the market – but ‘market timing’ is a lie.
Before you buy, you must decide when you will sell. Your exit strategy is crucial to your success and you don’t want to make the decision of when to sell in the heat of the moment.
By making the decision about when to sell before you buy, you increase the likelihood that you will stay on track.
Furthermore, we believe you should make your investment decisions when you’re ‘sane,’ and for most people, the only time they’re 100% in their ‘right mind’, is when they’re sitting in all cash.
Once they have even one dollar at risk, their fear and greed kicks in and it becomes way too hard to make rational decisions.
Monitor Your Progress
The final component to your strategy is to have a system in place to monitor the success and progress of your investments. Keep in mind, how you gauge whether or not you’re on track should be tailored to you and your objectives.
For example, what measure of performance will you employ – yield or return? If you make a mistake, how will you adjust your course?
How you monitor your investments should alleviate the emotional reactions you may have to market fluctuations and enable you to take the same systematic, business is business approach to investing that truly successful investors have.
If you consider and build your plan using these 5 components, you will be miles ahead of the most investors who jump into the stock market with a mere piece of the puzzle – or worse – no plan at all.
In Habit #3 (Part 3 of this 5-Part series), we will offer deeper insight on how to monitor and measure your investment success like a pro!
Part 1 – Part 2 – Part 3 – Part 4 – Part 5
