Most “do-it-yourself” investors fail miserably over the long-term. As a matter of fact, the majority of professional investors fail to beat the returns of the broader market indices every year. That said, there is one common trait that every successful investor shares…an investment plan!
Unfortunately, simply setting up an investment plan isn’t enough to succeed these days. You also have to have the discipline to carry out that plan (come rain or shine). Contrary to popular belief, the market does not control your investment success…you do!
Even though death and taxes are the only guarantees in life, a proper investment plan should drastically improve your odds of long-term success. However, it is unlikely that you will stick to your plan unless it fits your personality and you truly believe in it. Some investors consider the term “trader” a four-letter word. It’s just not in their DNA to actively trade their investment capital. On the other hand, some investors classify a position that they hold overnight as “long-term.” There are no right or wrong answers when it comes to one’s investment beliefs and investment plans will be as unique as the investors themselves. That said, your plan should only include strategies and time frames that you are comfortable executing. Be honest with yourself!
We all know that emotions cloud our decision making, which is why it is critical to keep these emotions in check by establishing concrete, simple rules for investing. If your rules are too complex, you are setting yourself up for failure because you probably will not be able to follow them consistently. The best advice that we can give investors regarding an investment plan is to write down your rules and follow them religiously!
We started Parsimony Investment Research to share our experiences, strategies and research with fellow DIY investors and we can’t stress the importance of establishing a proper investment plan enough. Planning is the most important part of the investing process, yet most investors spend the least amount of time on it (if any time at all). Clearly, planning is not as much fun as buying a stock…but it is 10 times more important!
Without further ado, below are our 4 key principles of a proper investment plan (in order of importance):
Dr. Van K. Tharp, a renown author and investing coach, originally coined the term “position sizing”. Dr. Tharp adamantly believes that poor position sizing is the #1 reason why investors fail to succeed. In other words, investors often fail due to an abnormally large position going sideways, which ends up sending their portfolio into a downward spiral that is almost impossible to recover from. By diversifying your portfolio, you reduce the risk that one stock or industry derails your entire long-term investment plan.
Key rules to consider for your plan:
Even though most investors focus more energy on their entry strategy, your exit strategy is really the driver of long-term investment success. Exiting a bad position or hedging your portfolio at the appropriate time is what keeps you in the game long enough to win. Investors need capital to survive and proper risk management strategies will offer excellent downside protection to your portfolio when you need it most.
Key rules to consider for your plan:
Whether or not you use our rating system to select and monitor stocks for your own portfolio, we encourage you to create and define a stock selection strategy for yourself and have the discipline to carry it out.
We believe that patience is a virtue. For example, just because a particular stock has a high Parsimony composite rating, it does not necessarily mean that you should run out and purchase it that day. We scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target “Buy Zone” for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. In other words, we use fundamentals to decide WHICH stocks to buy and we use technicals to decide WHEN to buy those stocks.
We focus on four key levels of support when determining a “Buy Zone” for our DIY Dividend Portfolio stocks:
If you are a new investor and are building a portfolio from scratch, do not feel pressured to have a fully diversified portfolio on day one. Investing is a marathon, not a sprint. It’s extremely important to be patient when building a long-term portfolio…we can’t stress that enough.
