An investing plan is a set of rules and guidelines
that defines how you invest.
An investing plan helps you decide in advance
what you'll do and how you'll do it.
This creates a repeatable process
that can take the guesswork out of investing
and make the investing process much easier.
Each plan includes six important components.
The investments objective, watch list criteria, entry rules,
money management rules, exit rules, and routines.
In this video, we'll briefly examine each component.
Let's begin with objective, which
represents the specific goal of your investing plan.
Once you have this in place, you'll
set rules based on your desired outcome.
An objective can vary from the goal of an individual trade
to the goal of your entire portfolio.
Because each objective has a different scope,
investors may implement multiple objectives simultaneously.
For example, you may use one investing plan
with an objective that concerns your overall portfolio
such as asset allocation among stocks, bonds, options,
and cash, and then you could have
another investing plan for a specific asset class,
like stocks.
This plan could help you decide which
stocks to buy, when to buy them, how many shares to buy,
and when to sell them.
Now on to the next component, the watch list criteria.
This section details what specific qualities
you're looking for in an investment.
Any investment that meets these criteria will
be added to your watch list watch
list criteria will differ for each investor some investors
might create a watch list based on a company's
financial statement, which is known as fundamental analysis.
Other investors might use price and volume movements
to determine whether a stock fits their watch list criteria.
This is technical analysis.
Many investors combine elements of fundamental and technical
analysis into their watch list criteria
because both can help determine which securities to watch.
Once you've created your watch list
you need to determine when to buy.
These are known as entry rule, guidelines
that dictate when you'll purchase
a security on your watch list.
Determining your entry rule before you buy
reduces the guesswork when deciding when to enter a trade.
Entry rules may be different depending on the investor.
But here's one simplified example.
Let's say you have company stock XYZ on your watch list
and are waiting for the correct time to buy.
Your rules dictate that you'll invest in a stock.
For example, you might choose to invest when the stock's price
breaks resistance with high volume,
say 150% of the daily average.
With this rule in place, you keep an eye on the chart.
But when this happens, it begs the question,
how much do I buy?
This is when you consult the money management rules
component of your investing plan.
Your money management rules define your position sizing
guidelines.
To put it another way, this is where
you weigh your portfolio size and your risk tolerance
to figure out how many shares to buy.
When it's time to buy, you should first
look at your portfolio to determine how your transaction
will fit in the big picture.
For example, you may have a rule that you
won't invest more than 10% of your portfolio
in any one security.
If you have a $100,000 portfolio you
wouldn't invest more than $10,000 in a single security.
Now that you know what to invest in and when to buy,
let's move on to the next investing plan component--
your exit rules.
Exit rules are important because you've already
determined the acceptable profit or loss
before entering a trade.
For example, one investor might have
an exit rule to place a stop order
at 3% below recent support levels.
If the price hits this level, it will trigger the order
and the security will automatically be sold.
Creating these rules in advance removes emotion and uncertainty
from your trading exits.
You'll know what to do, no matter which
direction the market goes.
Now all you have left to do is create a routine and follow it.
This will help you make sure everything
is in its right place.
Often, a routine consists of quarterly, weekly, and possibly
daily actions.
Your routine can involve everything
we've mentioned so far.
Maintaining your objective, creating and updating
a watch list, buying and selling assets in line
with your entry and exit rules, and balancing your portfolio
according to your money management rules.
With an investing plan by your side,
you'll soon feel confident every step of the way.
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