How to design the right investment plan … specific action steps to take today … preparing for whatever the market brings
Happy 2023, you big quitter!
Actually, that’s only meant for 43% of you. The rest of you are amazing.
Now, before you cancel your Digest subscription, research shows that 43% of people expect to give up on their New Year’s Resolutions this year. In fact, this 43% “quit” rate is expected to kick in by just February.
Not too encouraging.
I would guess that results are equally bad – if not worse – when it comes to New Year’s investment resolutions. And that’s if any such resolutions are made in the first place.
Why are most investment resolutions especially flawed?
Well, a big reason is because most of the goals associated with an investment resolution are binary.
“Did I beat the market?”
“Did I earn 15% on my portfolio?”
“Did my investments generate enough cash-flow to cover the down-payment on the new house?”
These are all reasonable goals, but they focus exclusively on the result rather than a process – the “payoff” rather than the “playbook.”
The truth? The only thing we can control is the process.
Think about it. Myriad influences will impact your returns in 2023…
Inflation, interest rate hikes, whether the economy falls into a recession, how the war in Ukraine proceeds, how quickly China reopens its economy despite soaring covid infections, technological advancements, new legislation, geopolitical conflict, the list goes on and on and on…
We have zero control over these factors, so why not forget all the absolute “I will make X” type resolutions, and instead, focus on what you can control, which is a well-executed process?
With that in mind, here on this first trading day of 2023, let’s turn our attention to making an investment plan.
Even if you’re only moderately successful in implementing it this year, odds are it’ll still be a huge help to your portfolio come 2023.
Let’s jump in.
Creating the perfect portfolio for you
Step 1: Open your calendar, and pick a day/time when you’ll be able to dedicate 100% of your focus to your portfolio. Say 30-60 minutes. But if you have more time, wonderful.
Step 2: Before you log in and check out your existing portfolio, stop. Think about what investments would go into a “perfect” portfolio today, looking forward.
For this step, what you presently own is irrelevant. This is a mental exercise to help you identify a “best of” portfolio based on your investment goals and needs.
As you think through this, ask yourself…
What’s the portfolio’s primary goal? Capital growth? Income? A mix? Why? Over what time-frame? Is it a defensive orientation or are you looking to grow aggressively? How much volatility can you stomach?
Next, narrow down.
Given the goals you just identified as well as your answers to the aforementioned questions, what asset classes need to be in this portfolio? From which global markets? Which trends do you want represented? In what allocations? What else? What other considerations should this perfect portfolio reflect?
Continue to dig deeper…
Within each of your chosen asset classes, or markets, or trends, which stocks and/or other investments do you believe offer you the best exposure?
This process can be as simple or detailed as you want with tailored it to your unique situation.
For instance, say you generally outsource your stock selection to experts; you have some picks from our stable of analysts – stocks from Louis Navellier, Eric Fry, and Luke Lango; trades from John Jagerson and Wade Hansen, as well as Luke; altcoins from Luke and Charlie Shrem; perhaps some private deal from Luke too.
In this situation, you might consider how much weight you want to give each analyst’s picks within the framework of your overall portfolio.
Whatever feels appropriate for your specific financial situation and goals, write it down.
Whether you’re writing down specific stocks or allocations toward the picks of specific analysts, it can be very helpful to detail why you’ve made this choice – which will tie it back to your overall portfolio goal.
For instance, “I will weight 10% of my overall portfolio to commodities plays from Eric Fry, because it will offer diversification from the larger equity component of my portfolio, while also giving me exposure to massive trends like EVs and next-gen batteries.”
Basically, document the reason for all your choices and how they support your main investing goal.
Step 3: Be realistic about your desire to swing for the fences.
Nearly all of us harbor a fantasy of throwing a few bucks at, say, a penny stock, and watching it explode in value. Eight months later, we’re driving a new Porsche, or taking that European vacation, or putting the kids into the elite private school, whatever your fantasy is…
So, let’s be realistic about this.
Pick a percentage of your investable assets you’re willing to gamble with. The amount should be no greater than what you could completely lose without having it affect your sleep. Whether that’s 0.05%, 1%, or 15%, be honest with yourself.
It often helps to turn your chosen percentage into an actual dollar amount based on your portfolio size. Then image burning that cash.
Are you still comfortable? If so, great. If not, lower your gambling percentage.
Step 4: It’s time to bring your existing portfolio into the mix.
Line up your current portfolio next to the “perfect” portfolio you just created.
Note the discrepancies.
Is there a stock in your existing portfolio you wouldn’t include today with new money? It gets the axe.
Do you have 95% of your stocks in U.S.-centered companies when you want it to be just 65%? You need to do some trimming.
Zero exposure to 5G stocks in your current portfolio yet you want some? Time to buy.
“But wait!” you say. “It’s not that easy. I have major capital gains in some of my current stocks that I’d otherwise sell” (or you have some other reason to avoid making a portfolio change).
Okay, there are always complications. But if so, at least identify when and how you’re going to make the necessary change – regardless.
Allowing an underperforming investment to stay in your portfolio year-in-year-out to avoid paying a capital gain carries a huge opportunity cost. Yes, you’ll suffer the short-term pain of a tax-hit from a capital gain, but think of the negative possibilities…
What if that investment suffers a big earnings disappointment?
The stocks dives and your unrealized paper loss is way more than the actual loss you’d have suffered had you just sold it and paid taxes.
On the other hand, if it doesn’t do poorly, but just trades sideways, think of what that capital could be earning for you in a much stronger investment. Even a money market fund at 1.5% would be a better use for your capital than a stock that goes nowhere (or down).
So, if you have a reason why you don’t want to sell a legacy holding, okay. But at least be intellectually honest with yourself about why you won’t sell, recognizing the opportunity cost.
And remember, you don’t have to sell a bad legacy holding all at once. Perhaps you’d stomach it better if you sold it in chunks. Be creative about how you might address the problem. Just don’t let a toxic investment drag down your portfolio without being intentional about it.
Step 5: At this point, write down your entire investment plan.
It can be as detailed as you want. But in general, it’s going to have the following features:
- Your overall portfolio goal. Growth? Income? A mixture?
- Your current holdings
- Your desired “perfect” holdings (and an awareness of how each of those individual holdings will support your overall portfolio goal)
- The strategy you’ll use to transition from your current, legacy portfolio to your new perfect portfolio (including the reality of taxes and whatnot)
- Your plan to scratch your gambling itch – will you let those investments ride all the way to $0 if necessary? Or will you sell at some stop-loss? What about profits? Will you sell when you’re up “x%” or let it ride? Think through these scenarios
- The future date at which you’ll rebalance and/or re-evaluate your broad portfolio
- The criteria by which you’ll remove an asset from your portfolio. (Did it hit a stop-loss? Has it quadrupled and you’re taking profits? Did your reason for owning it change? And so on…)
- How you’ll use new money to add to your portfolio. For instance, will you increase the size of each of your existing stocks? Or will you add more to only those stocks that are down, trading at lower valuations? Or will any new money go toward buying brand new stocks that you’ll find over the coming year?
Your investment plan obviously can be far more granular, but if you do just this, it will put you miles ahead of 99% of other investors.
I hope 2023 is fantastic for you and your family. And a way to make it “financially” fantastic is by creating your own investment plan – today.
Have a good evening and a great 2023,