Investment Plan Example & Trading Portfolio; Momentum Q3 2021 update

Plan for the worst and hope for the best.

Quite the opposite of what some politicians seem to be doing currently. Politicians are planning for the best and hope they can talk themselves out of any future problems. No wonder trust in politicians has plummeted from an already low level in the last two years or so. Lower trust levels will likely lead to lower GDP growth in the years ahead and less investment in the lower trust countries.

Take things like the UK government’s decision to increase England’s health workers pay by 3% in 2021 for example. The UK Consumer Price Index (CPI) rose by 3.2% in the 12 months to August 2021. This is unlikely to motivate exhausted health workers. Good luck with the NHS this winter Sajid and Boris.

In investing luck plays a big role. Some things we can control though. Things like having an investment plan before we start to DIY (Do It Yourself) investing we control ourselves.

As Annie Duke says in her excellent book “Thinking in Bets”;

“Any kind of outcome has the potential for causing an emotional reaction”.

Your investment plan can control your emotional reactions to things (luck or bad luck) that can happen in the stock market. An investment plan makes it easier for us to take the long view and if we can stick to the investment plan lets us invest in a more rational way.

Annie also writes;

“Investment advisors do this with clients, determining in advance, as they are discussing the client’s goals, the conditions under which they would buy, sell, hold, or press their positions on particular stocks. If the client later wants to make an emotional decision in the moment (involving, for example, a sudden rise or drop in the value of an investment), the advisor can remind the client of the discussion and the agreement. Will that prevent an emotional, irrational decision every time? No. But it will happen less often.”

The stock markets offer good odds to increase the purchase power of your money, but nothing is certain. We need to avoid ruin. As long as we stay in the “game” we live to fight another day.

Investing with leverage increases the risk of ruin. Investing in a portfolio that is not diversified enough also increases the risk of ruin.

Visualize yourself investing in the stock market and losing all your money. That is not a great feeling right? Now make sure that never happens to you.

An investment plan enables us to plan for the worst and hope for the best.

An investment plan can enable a DIY investor in the stock markets to access the good odds of the international stock markets in a systematic and disciplined way.

Let’s write an investment plan for Joe Mainstreet;

Investment Plan Joe Mainstreet

· At the start of every tax year invest $10000 in the stock markets if the money is available. Only invest money you can afford to 100% loose. So the first investment round is to invest about $10000 in the stock market.

· The position value should be as close to $2500 per position when you buy the position as practically possible.

· After the first investment round if your portfolio return at a later investment round is negative you will invest maximum $30000 rather than $10000 in the stock markets if the money is available.

· When you buy a position into a single stock like say Apple, you never buy more of that specific position (say Apple in this example). This is because every individual company by itself can go bust. You are only allowed to buy more of positions that are diversified in and of themselves like a mutual fund or an ETF or an investment trust/closed end fund.

· When you need to take cash out of the stock account you first try to take out just the dividend cash payments that are coming in on the stock account...… You invest for the very long term, but if one day you need to take out extra cash above and beyond the normal dividend income, you sell a similar % slice of every holding. So if you have 10 holdings you can sell for example 10% of each and every one of the 10 holdings...

· If you have a choice, always go for dividends in cash rather than in stock dividends. The dividends will build up your cash position in the stock account. Those dividends can be used to pay for the costs that the broker may charge you for the privilege of having stock account with your broker. Those dividends will also help to fund your new positions in the stock account and therefore diversify your portfolio even more.

· Never use leverage in your stock account.

· Diversification through asset classes, time, positions and different currencies is your friend to help with the defence. If you invest in a position that trades in $ your first investment after that and the second investment after that should be in a different currency than the $. Only on the third investment after that are you allowed to choose a $ investment again.

· Invest for the long term. Try not to take out any money of the stock account for a minimum of 20 year unless your financial situation has changed. Do not get in the way of the compounding of your stock portfolio.

· When you are retired you can take out 3% of the portfolio value using a combination of dividend income and selling per year in negative stock market years. When you are retired you can take out 4% of the portfolio value per year using a combination of dividend income and selling in positive stock market years.

· More diversification is good, but please avoid bonds at all cost unless interest rates go above 5% again.

· If you manage to make 10% per year and you keep your profits re-invested in your stock account than your money in the stock account can double every 7 years. That is the power of compounding and time.

· If you put $50.000 into a stock account and you are lucky it can become $100.000 after 10 years and $200.000 after 20 years and $400.000 after 30 years. Time is your biggest friend. Time in the market is much more important than timing the market.

· Think about companies that you admire and like and whose products you like to buy. If those companies are listed they can be excellent investments. You will also have higher confidence in your portfolio during recessions/bad times if there are enough companies in the portfolio that you rate highly.

· Good luck. It is better to be lucky than smart..... Make your own luck by sticking to the above investment plan!

An investment plan as you see doesn’t need to be longer than one A4 page. Hopefully the investment plan will work for our imaginary friend Joe Mainstreet.

Obviously one can make unlimited different versions of the above investment plan. As long as the investment plan clearly states when to buy and when to sell and when to invest new money in the portfolio the investment plan should do all right for the truly long term investor (time horizon 20 years plus). The above investment plan also invests new money more aggressively into the stock markets when global stock markets are selling off or crashing like in March 2020 or Black Monday 1987. For a non leveraged long term investor that is still not taking any money out of a stock portfolio and is still building up a stock portfolio with new money inflows the only thing that changes in a stock market crash is that the stock market offers better odds of higher future returns when making new stock purchases.

It is now time for a quick update on the Trading Portfolio; Momentum project.

The fourth quarter of 2021 has already started again. After taking out the dividends of the above portfolio at the end of Q3 the current value is $72284.

On the 10th of July 2021 the value was $70379.

So despite the damage of the global stock markets sell off in September 2021 the Trading Portfolio; Momentum still managed to squeeze out a positive absolute return in Q3 2021.

The relative return then was also good in Q3 2021. The relative return was behind the return of the VOO S&P 500 Etf on both portfolios tracking websites (Sigfig and Stockrover) at the end of Q2. Now the Trading Portfolio; Momentum value is ahead on both portfolios tracking websites.

The Sigfig website has the VOO Etf position value as $71241.

The Stockrover website has the VOO Etf position value as $71003.

The real money broker portfolio (Trading Portfolio; Momentum) is currently valued as $72284.

Whilst it is nice to be ahead of the benchmark the difference is still very marginal and is not saying anything yet (another 2 years time horizon at a minimum is needed to start drawing any conclusions).. Hopefully the Trading Portfolio; Momentum portfolio can build on this outperformance in the coming years so the rebalancing work is not all for nothing.....

It will be interesting what 2022 will bring for the stock markets. In general any position that had good stock market returns in 2020, had bad returns in 2021 and vice versa.

The Trading Portfolio; Momentum is a real money investment portfolio that uses momentum and as much equal weight positioning seizing as possible for such a small $ value portfolio. These were the biggest weightings in the portfolio at the end of Q3 2021;

As you can see the five biggest holdings were only about 17% of the portfolio. For the S&P 500 index the five biggest holdings are about 20.7% of the index (Apple AAPL 6.2%, Microsoft MSFT 5.9%, Amazon AMZN 3.9%, Alphabet A GOOGL 2.3%). So in Q3 the S&P 500 index was once again more concentrated and less diversified than the Trading Portfolio;Momentum.

As always thanks for reading the blog and good luck with your own investment journey.

The blog is not advice on what you should do with your money and was written for information purposes only. When you invest in the stock markets it is possible to lose money. Please do your own research. If in any doubt what is best in your individual situation, please hire a licensed financial advisor.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks and ETF’s that were mentioned in the above blog. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.