I’m fairly certain I have written a similar Blog to this many years ago and I think it might have been titled with the use of the word ‘Roadmap’ or something; but I can’t be too motivated to dig it out and I don’t think it will hurt one little bit to scribble out something new which might have some additional thoughts in it and certainly is in tune with the current zeitgeist.
However, I have been enthused to write this because the recent plunge in the Markets and the behaviours and activity I have witnessed on Twitter etc. have highlighted to me that so many People do not have any kind of Strategy and even less do they have a Flexible Plan that is able to adapt fairly quickly to changing circumstances. There doesn’t seem to be a lot of thinking ahead yet it is vital that you do this. The most obvious manifestation of this is that a large number of People are clearly ‘Uber Bulls’ and they in essence remain pretty much 100% Invested whatever the Markets do. This has proven to be a very profitable and wise approach for the last 12 years of a rampant Bull Market, but the idea that this will always be the case is in essence very naïve and dangerous.
Although having written that last paragraph, I have to at least give People who do such a thing a bit of credit for actually having some sort of Plan – their Strategy is basically to do nothing and just ride it out. Of course there are obvious flaws with this and if we do get a proper full-on Bear Market then People who do this might start feeling extremely uncomfortable and unhappy. At the time of reviewing my earlier draft of this blog on the evening of Wednesday 11th March, things look pretty bearish to me.
A big psychological challenge that all Investors face is that we tend to totally overestimate in advance what our tolerance for Risk is and we think that we can calmly handle severe Market drops and all will be hunky dory. Trouble is that once it comes to the crunch, I can pretty much guarantee that People who do this will be absolutely miserable and unable to sleep and generally in bits. This is not a mental state that will help you with long-term and successful Investing. It is much more likely to make you sell up everything and leave the Markets in disgust.
If you have a Strategic Plan that you update as time goes along, then you are less likely to get into a panic situation and more likely to remain calm and in a relaxed and effective state of mind so that you can make the crucial decisions required for Investing and to achieve profitable outcomes. The same applies to Short Term Trading although perhaps the Strategic Timeframe is compressed a lot and what you do is much more Tactical. There are of course Strategic elements to Short-term Trading such as your Exposure limits, Position Sizing, Number of Trades to run at a given time, methods of Triggering Trades etc. etc.
In the recent Sell-offs I have seen lots of People ‘flip-flopping’ where they are buying a Position and then in a short space of time they are dumping it. This just highlights a muddled mindset and lack of Strategy and it shows that the ‘Investor’ is reacting to events and being blown around by the ravages of the Market’s twists and turns. A true Long-Term Investor would be buying into a Stock, perhaps as a Starter Position, and then holding tightly to it after having done weeks and weeks of Research and Analysis. Such an Investor would also have a sense of where the overall Markets are and it was pretty clear in recent weeks that Markets were extremely toppy as my Weekend Chart Blogs were flagging up continually. It should have surprised no one that we dropped off the Peak and to have been buying heavily in such a Market condition was asking for grief.
If you are continually chopping in and chopping out of a Stock it probably means that you are not really a Long-term Investor and I would say you are behaving more like a Short-term Trader (not a Day Trader – that is someone who is ultra Short-term). That is fair enough but you are probably going to cause yourself a lot of Cognitive Dissonance and mental anguish if you purport to be a Long-term Investor but you are actually doing the actions of a Short-term Trader. You’d be amazed how often I see this basic failure of Approach and Strategy and I have no doubt that fixing this contradiction would make a huge difference to the Person’s Returns and also mean they sleep a lot better and suffer much less brain-ache (while I think of it, the discipline of only making Buy or Sell decisions out of Market hours would also help a lot of people perform better).
Rather than all this stress and mucking about (and making your Broker and other Traders very rich !!), it is without doubt more effective to have a Flexible Strategic Plan and then to focus on the Execution of that Plan. Better this controlled and calm way of taking on the Markets than the alternative of just making it up as you go along and in effect you are more likely to execute yourself !!
I also find it strange that People are so eager to Buy with even just a small Fall in the Markets. I have seen loads of People on Twitter who are just buying every day there is a fairly large drop but it means that they are just buying all the way down the Slide and surely it would just be a lot easier and more effective to buy after a Proper Bottom is in or perhaps to buy heavily after some substantial falls like 30% off the Peak or that sort of thing. Buying after a tiny drop of maybe 10% when there is something so significant as this Virus appears to be, probably just means you get in far too early and suffer more damage as the Markets fall. I continually hear the “you can’t time the Markets” phrase but I really am not convinced by this and if you read my Weekend Stocks & Markets Blogs I am working on timing constantly.
What is a Flexible Strategic Plan?
I guess this is an easy phrase but actually defining it is not so easy !! In the next section I will outline my own Current Plan which should give some idea of what kind of level I am working at and what I mean by ‘Strategic’. In essence, such a Strategic Plan has to be at a ‘high level’ and is about what you plan to do in coming weeks and months. It needs to be flexible and in truth it needs to be something you can totally ditch if the situation changes dramatically and you now need a completely different Strategic Plan. For example, as you will see in a bit, my current Plan is very much devised for a heavily falling Market, but once the situation changes and we get back into rising Stocks, I will be switching to a more Bullish oriented Strategy.
On top of this, as we went into 2020 I was really feeling quite bullish and eager to get quite serious about doing lots of Index Trades on both the Long and the Short side, after many years of practicing this and getting it to a stage where I am pretty sure I can make it work. However, it wasn’t long before the smelly brown soft and warm stuff hit the spinning whizzy thing and my previous Plan had to be ditched very quickly.
Alternatively, a Strategic Plan can be adapted in part to reflect a change of circumstances and it should be constantly up for review and consideration. As you will see from my own Plan below, if I say I will be looking to buy some Stocks when a particular event happens (this time for me it will be when the Markets have properly bottomed out) I do not name what these Stocks are or how much I will buy of each one – these are more Tactical considerations and something which is the next level down of Planning. It is also something I need to pay more consideration to very soon although we are realistically months away from the Buy Point I suspect.
Right at the start of this Blog I mentioned the word ‘Roadmap’ and that is actually highly appropriate. In effect my Strategic Plan is a Roadmap for how I intend to proceed in coming months but the Roadmap is one whereby I can change direction very quickly if I see the need to.
I must also stress that a clear focus on the Index Charts is an essential part of monitoring how my Strategic Plan is doing. There is no point having a Bullish Strategic Plan if the Index Charts are telling you that Stocks are in trouble and we can expect falls ahead. For this reason I am checking Index Charts every night and they are a key part of my Sunday Night blog writing where I am constantly reviewing the situation.
Simple Technical Analysis and Charting stuff like Candlesticks can help hugely and they also work on longer timeframes which suits the Strategic nature of the Plan I am talking about. For example, Weekly and Monthly Candlesticks can give a good steer on Turning Points and extremely powerful signals like Break-down through Support or Breakout above Resistance are such a big help in Planning a Strategy and in carrying out its Execution. People who do not use simple Technical Analysis techniques are missing a trick. Of course, many of these TA things are tactical as well and it is up to you how you define your levels of planning.
My Current Plan
In order to add some ‘colour’ to this blog, I want to just quickly outline what my Strategic Plan is at the moment – and it is actually pretty simple.
I have written about this I am sure in my Weekend ‘Stocks & Markets’ blogs and I have definitely talked about it on Twitter and probably slipped bits of it into other stuff I have put out. Anyway, the essence is that I am holding on to my Stocks because I don’t want the expense and hassle involved in smashing up my Portfolio and moving to Cash (this has Costs and Timing Drags which hurt your Portfolio as you liquidate and as you buy back once the turmoil is over – see the ‘Related Blogs’ section below) and therefore I have Hedged my Portfolio using S&P500 Shorts and FTSE100 Shorts.
At the time of writing this I think we are still in the Downtrend as the bullishness is steadily (and not so steadily some days !!) being ground out of the Markets by the Bears and my Strategy will be to start Closing the Shorts once I think the ‘proper’ Bottom is in and it is not just another bit of trickery by the Markets to suck Buyers in. At this point in time I intend to remove the Shorts in stages as this helps to get as near to the proper Bottom as possible and ideally once the Shorts are all off, I will be looking to go Long on an Index (probably the S&P500) and to juice up my Portfolio from the rapid bounce back that you always get in the early part of a Recovery phase after a major Sell-off. Remember, Closing Shorts is in effect like buying Shares so it is a very quick and effective method of increasing exposure to Stocks once the Markets have settled down.
Depending on what Cash I have lying around (not very much by the look of things !!) I would also like to selectively buy a few things and I will be especially interested in getting something for my Income Portfolio which has enough spare Cash from Dividends to be able to buy another Position or to buy more of a Stock I already have.
With all this in mind, my focus is on watching the Index Charts and keeping up with the News to try to time when the proper Bottom is in and then I will be Closing the Shorts. In the meantime (because I think that is some weeks away at the earliest) I will be sniffing around to see and decide on what I can buy for my Income Portfolio – there are plenty of possible candidates.
It won’t be easy to spot the Proper Bottom but there are several clues and one that I am fixated on is the use of Fibonacci Retracements which highlight the levels just under 5000 and around 4000 on the FTSE100. As we approach these my senses will be on high alert to look for signs we are bottoming; and the Price Action and Charts after this will help give signals as to whether or not we saw a Bottom.
An anecdotal thing to watch is for Fear to be utterly dominant and for nobody on Twitter to be saying they are buying – we need the Fear to be so extreme that utterly no one has the guts to buy – that is a true sign of Capitulation by Bulls. On the Charts we should see a nice Reversal Pattern on the Candlesticks and a big rise in Volumes.
My intention for the coming Week is to look back at 2009 and see what the Technical Indicators were telling us back when it bottomed. From a quick look last night it was clear to me that several things like the Fibonacci Levels, Monthly Candlesticks and 13/21 Day EMAs (Exponential Moving Averages) were giving very good Buy Signals. My idea is to include the Charts and show Readers what to look for. Obviously I will be looking for them as well and reporting what I see most likely on Twitter and of course when I trade I will show it on my ‘Trades’ page.
Anyway, that pretty much covers it. If you don’t have a Plan it is probably worth putting some time into it and getting one sorted – write it down on Paper if you need to or if you are all modern and with it, then you could even use a Computer !!!
Right, that’s it, good luck out there and keep your wits about you and don’t be chopping in and out. Your Broker is wealthy enough already !!
This Blog goes in detail into the mechanics of moving into Cash and the costs involved and suchlike, and why I like to Hedge:
This Blog is from yonks back and covers a lot of stuff which could be key bits of a Strategic Plan:
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