3Notes: Your Investing Gameplan


Setting an Investing Gameplan

A gameplan is essential to any successful endeavor. It keeps you within the bounds of your goals and rules, providing your future self guidance in decision-making. In Investing 201 Pt 2: Investment Strategies, we looked at the foundations of our gameplan by exploring tools in our toolbox. A common strategy for beginning investors is the Long Strategy; simply buying and holding assets and allowing them to grow. Let’s dig deeper.

$1 Goals and Risk Aversion

We weather the fluctuations in the market by sticking to our investing thesis. This thesis should include that time horizon for the portfolio, earnings goals, risk tolerance, and target sectors or companies. Write down these rules so you have all the information you need to make solid decisions based on performance. If your goal is 20% growth for some other ambition, such as down payment, sell when you hit your goal. If your lower limit is losing 20%, you don’t necessarily need to make changes during a 10% pull back. That 10% drop in year 2 of a 10 year time horizon allows time for your portfolio to recover.  Keep these written parameters and revisit them at least twice a year.

$2 Sector Volatility (Idiosyncratic Risk)

When sector moves but the market does not, we move from market risk to idiosyncratic risk. This means that there is some additional risk tied to your company or sector/industry above the market. This can cause extra gains or additional losses above what the overall market does. Be careful not to over-expose yourself to one type of company or sector. Are the potential losses or gains in that sector crossing some hurdle in my gameplan? If so, you can look at reallocating your portfolio, otherwise stand pat.

$3 Regular Checkups

It is important to also tweak your gameplan at regular intervals. In sports, the team that fails to make adjustments falls behind the competition. The same is true for your investing gameplan. Adjustments are necessary to keep you operating with all available information in mind. Set a regular pattern of reviewing your strategy at a less frequent pace than your portfolio review. I readjust my own gameplan at least semi-annually, sometimes quarterly in particularly uncertain times. Find an interval that works for you and feel free to seek advice during your review.

That’s all for now.

-Joe

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