Investing vs Guessing: Three Steps to Follow
When putting your money to work, take the guesswork out of the equation.
Just as we work for our money, we want our money to work for us. In order to achieve this, many of us invest. Some follow structured methods, while others follow the herd — or leave decisions to guesswork.
As a systemic investor managing and growing my own stocks portfolio for over 10 years, I’ve listed three actionable steps to help you take the guesswork out of the equation. Sure, investing by nature is risky and you can lose everything you put in, but that doesn’t mean that you’re guessing all through the way.
Step 1: Strategy — Define your Investment Strategy
The first step is to have an overall strategy.
This step includes items such as:
- What is the amount you have available to invest?
- What asset classes you like to begin with?
- What is the time range you’re after?
- When would you like to get your money back?
- What do you wish to do with dividends?
- What sort of investments will you go for — e.g. value, growth, etc?
Step 2: Structure — Make a Structure
The next step is to have a structure that can help you execute this strategy. This is not a repeatable activity and, in some ways, it’s like the scaffolding that’ll hold the system together.
This includes getting the basics in place — you can look at this as fixed items such as selecting a brokerage account, opening an account, and putting in some money to get yourself going.
This step includes items such as:
- What’s the most tax-efficient way to invest?
- Which is the best account that meets your needs?
- What clearance do you need from your employer, if any?
- What will be your sources of knowledge and insights?
Step 3: System — Create and Follow a System
Finally, you need a system that can help you execute upon your strategy flawlessly, while leaning on the structure to make this easy.
This step includes items such as:
- What is the time you’ll be studying and analysing your portfolio and the market?
- What logic will you follow to determine your trades?
- What is your risk tolerance?
- What will you do if your trades breach risk tolerance?
While a lot of this seems obvious and basic, it’s the basics that often let investors and traders down. Here below is a worked example of my own trading at the end of this quarter ending September 2023.
Please do not use this as advice as I’m not a financial advisor and am only sharing my own work.
Step 1 in Action — My Strategy
My investment strategy is to always stay invested.
Here are some basics I follow:
- Dollar Cost Averaging — I invest regularly agnostic of market conditions
- Compounding — I never withdraw any amounts; and reinvest all profits and dividends
- Stay Diverse — My portfolio is diverse but not too diverse. My smallest holding is 5% and the largest is c.15%. I’ve uploaded my portfolio on TipRanks and love that it also tells me where I stand in comparison to the others. It’s nice to have some idea :)
Step 2 in Action — My Structure
I try to focus on structure to make the system effortless.
Here are some basics I follow:
- Stocks ISA — Considering I live in the UK; I invest in a Stocks ISA as I find that it meets my needs.
- Employer Clearance — I usually have requirements such as pre-trade controls, where I need approvals before I can trade, and so I read up on the policies to make sure I do the right thing.
- Knowledge and Insights — I use several sources of knowledge including Reuters, Bloomberg, and TipTanks, which gives me a lot of insight on the key stocks to go for at any given time.
Step 3 in Action — My System
Finally, my system. This stage includes intricate thought patterns that are unique to us all and can vary significantly based on our discipline, risk appetite, experience, and so on.
Here are some basics I follow:
- Logical Flow: I have a logical mental flow where I compare my portfolio with market trends and analyst recommendations to decide the next steps. For example, this September, I decided to reduce my technology stock weightage and increase energy exposure.
- Risk Tolerance: Some major indices weren’t great through September, and on the 29th of September, the Nasdaq & S&P ended on a positive note after some relief regarding inflation figures. This signaled hope that interest rates may not have to be higher for longer. It was all within my risk tolerance and though the US government shutdown is looming on several minds, there weren’t major shocks as far as I was concerned, and none of my trades were outside my limits.
- Rebalance: As mentioned above, I wanted to rebalance some items, and here below are some screens to show the logic I used. I looked up key dates — I find this handy when deciding when to enter/exit a trade.
I also used TipRanks Smart Score to look up energy stocks that would be of interest to me. While it’s important to do your own analysis, I find it useful to have a pre-scored list as a starting point for my top-down analysis before I go into fundamentals and technicals.
Conclusion
It takes a certain level of strategy and discipline to manage your investments, and it’s certainly not something you leave to guesswork. But equally, it’s not complex math. As Peter Lynch said, ‘All the math you need in the stock market, you get in the fourth grade.’
As Peter Lynch said, ‘All the math you need in the stock market, you get in the fourth grade.’
Disclaimer: I’m not a financial advisor and am not making recommendations. Please don’t take this as advice. Always do your own research and seek advice if you need it. Please use this only for educational purposes.
About Me:
I’m a senior leader in the financial services industry with over 25 years of corporate experience and have held substantial leadership roles in prestigious firms such as HSBC, Barclays, and BSkyB. I’m also an accredited coach, a published author, a global speaker, an Udemy instructor, and a marathon finisher. Click here to contact me for engagements.
