For an archive of The Daily Breakdown’s 5-Day Bootcamp, see the guide below:
Bootcamp Day 1: Picking a strategy
Bootcamp Day 2: Every strategy has a time and place
Bootcamp Day 3: Position sizing
Bootcamp Day 4: Trading around big events
Bootcamp Day 5: What to do during corrections
We’re going to do something a little different this week. Instead of the usual Daily Breakdown pieces, we’re going to help investors establish some strong investing principles throughout the next couple of days. So let’s start with Day 1 of this initiative.
Defining our goals
Everyone’s goals are different when it comes to investing and trading. While it’s okay for your goals to evolve over time, it’s important to sit down and identify what you’re looking to accomplish with your investments right now.
The goals don’t have to be long or complicated, either!
Investors might be looking for alternative income sources via dividends. They might have filled up their long-term savings account and are looking for places to divert extra cash from their paycheck for a larger potential return. Or they might be trading in an effort to try and generate extra income.
Regardless of what the reason is, we should know why we’re investing because our strategy will likely be based on the answer.
Keep this in mind: Investing objectives can change and evolve over time. In fact, they should evolve over time. If we’re successful in our investment journey, our outlook will likely change as we navigate the markets and continue to learn.
Picking a strategy
When picking a strategy, some investors think complex algorithms or having a dozen different indicators is the only way to succeed. But that’s not true!
Plenty of investors have a successful yet simple approach to the markets. Perhaps that is by consistently investing on a bi-weekly or monthly basis in a diverse ETF (like an S&P 500 ETF). Maybe it’s just a couple of technical indicators like moving averages or trendlines. Fundamental investors may only be looking for a reasonable valuation alongside positive earnings and revenue growth.
So how do you find the one that works best for you?
Well, this part takes some trial and error.
We know the long-term trend of the market has been favorable for patient investors, so that’s one area to consider starting in. For those who are looking to be more active in markets, journaling is an important method for finding success.
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Active investing and trading
Logging the entry parameters for the investment — like the date, the time, the reason for entry, etc. — and tracking the outcome — like the profit, the loss, and what went right or what went wrong — helps show us which strategies are working and which are not.
After you have a nice sample size to work with — say 20 trades, for example — look at your best winners and worst losers (in this case, say your five best and worst investments). Ask yourself: What do they have in common?
Usually, you’ll see a pattern between what’s a good trade for your style and what’s a bad trade. For instance, perhaps you’ll notice on the bad trades that you used too big of a position size or maybe it’s that you failed to sell the position and take a loss when you should have.
Ultimately, we’re looking for similarities to do more of what’s working and less of what’s not working.
In this discovery phase, investors’ key focus should be on the process, rather than the outcome. And because many of you might find yourself in this discovery phase, survival is critical and small position sizes are critical while doing trial and error (we’ll cover position size later this week).