Developing a Plan: The Basis of Successful Investing

Warren E. Buffett offers the following advice on the qualities of a successful investor. Buffett essentially suggests that a successful investor does not need an extraordinarily high IQ, exceptional business acumen, or inside information. To enjoy a lifetime of successful investing, you need a solid decision-making framework and the ability to maintain your emotions.

A successful investment strategy requires a thoughtful plan. Developing a plan is not difficult, but staying with it during times of uncertainty and events that seem to counter you plan’s strategy is often difficult. This tutorial discusses the necessity of establishing a trading plan, what investment options best suit your needs, and the challenges you could encounter if you don’t have a plan.

The benefits of developing a trading plan

You can establish optimal circumstances for experiencing solid investment growth if you stick to your plan despite opposing popular opinion, current trends, or analysts’ forecasts. Develop your investment plan and focus on your long-term goals and objectives.

Maintain focus on your plan

All financial markets can be erratic. It has experienced significant fluctuations in business cycles, inflation, and interest rates, along with economical recessions throughout the past century. The 1990s experienced a surge of growth due to the bull market pushing the Dow Jones industrial average (DIJA) up 300 percent. This economic growth was accompanied by low interest rates and inflation. During this time, an extraordinary number of Internet-based technology firms were created due to the increased popularity of online commerce and other computer-reliant businesses. This growth was rapid and a downturn occurred just as fast. Between 2000 and 2002, the DIJA dropped 38 percent, triggering a massive sell-off of technology stocks which kept indexes in a depressed state well into the middle of 2001. Large-scale corporate accounting scandals contributed to the downturn. Then in the fall of 2001, the United States suffered a catastrophic terrorist attack that sent the nation into a high level of uncertainty and further weakened the strength of the market.

These are the kinds of events that can tax your emotions in terms of your investment strategies. It’s times like these that it is imperative that you have a plan and stick to it. This is when you establish a long-term focus on your objectives. Toward the end of 2002 through 2005, the DJIA rose 44 percent. Investors who let their emotions govern their trading strategies and sold off all their positions missed out on this upturn.

The three deadly sins and how to avoid them

The three emotions that accompany trading are fear, hope, and greed. When prices plunge, fear compels you to sell low without reviewing your position. Under these circumstances, you should revisit the original reasons for your investments and determine if they have changed. For example, you might focus on the short term and immediately sell when the price drops below its intrinsic value. In this case, you could miss out if the price recovers.

An investment strategy that is based on hope might compel you to buy certain stocks based on the hope that a company’s future performance will reflect on their past performance. This is what occurred during the surge of the Internet-based, dot-com companies during the late 1990s. This is where you need to devote your research into a company’s fundamentals and less on their past performance when determining the worth of their stock. Investing primarily on hope could have you ending up with an overvalued stock with more risk of a loss than a gain.

The greed emotion can distort your rationale for certain investments. It can compel you to hold onto a position for too long. If your plan is to hold out a little longer to gain a few percentage points, your position could backfire and result in a loss. Again, in the late 1990s, investors were enjoying double-digit gains on their Internet-company stocks. Instead of scaling back on their investments, many individuals held onto their positions with the hope that the prices would keep going up. Even when the prices were beginning to drop, investors held out hoping that their stocks would rally. Unfortunately, the rally never happened and investors experienced substantial losses.

An effective investment plan requires that you properly manage the three deadly sins of investing.

The key components of an investment plan

Determine your investment objectives

The first component in your investment plan is to determine your investment objectives. The three main categories involved in your objectives are income, growth, and safety.

If your plan is to establish a steady income stream, your objective focuses on the income category. Investors in this category tend to be low-risk and don’t require capital appreciation. They use their investments as an income source.

If your focus is on increasing your portfolio’s value over the long term, your objective is growth-based. In contrast to the income category, investors strive for capital appreciation. Investors in this category tend to be younger and have a longer investment time frame. If this is your preferred category, consider your age, investment expectations, and tolerance to risk.

The final category is safety. Investors who prefer to prevent loss of their principle investment. They want to maintain the current value of their portfolio and avoid risks that are common with stocks and other less secure investments.

Risk tolerance

While the main reason for growing your portfolio is to increase your wealth, you need to consider how much risk you are willing to take. If you struggle with the market’s volatility, your strategy should focus more on the safety or income categories. If you are more resilient to a fluctuating market and can accept some losses, you might favor the growth category. This category has the potential for higher gains. Nevertheless, you need to be honest with yourself and the level of risk you are willing to take as you set up your investment plan.

Asset Allocation

As discussed in the previous sections, part of your investment plan is to determine your risk tolerance and investment objectives. After you establish these components, you can begin to determine how you will allocate the assets in your portfolio and how they will match your goals and risk tolerance. For example, if you are interested in pursuing a growth-oriented category, you could allocate 60 percent in stocks, 15 percent in cash equivalents, and 25 percent in bonds.

Make sure your asset allocation reinforces your objectives and risk tolerance. If your focus is on safety, your objectives need to include safe, fixed-income assets such as money market securities, high-quality corporate securities (with high debt ratings), and government bonds.

If your strategy focuses on an income category, you should focus on fixed-income strategies. Your investments might include bonds with lower ratings that provide higher yields and dividend-paying stocks.

If your focus is on the growth category, your portfolio should focus on common stock, mutual funds, or exchange-traded funds (ETF). With this category, you need to vigilant in managing your portfolio by regularly reviewing your objectives and adjusting them according to your risk tolerance and objectives.

Effective asset allocation helps you establish a guideline for properly diversification of your portfolio. This enables you to work toward your objectives and manage a comfortable amount of risk.

5 Reasons Why You Should Have a Legitimate Home Based Business

Most people do not realize they should be involved in a legitimate home based business. Why you should have a home based business is very important because there are valuable ways for you to save money yearly and make money at the same time.Everyone is taught growing up to go to college work the 9-5 job and be miserable for 25-35 years until you are allowed to retire and collect your meaningless pension of 40-50%. The crazy part is more people complain about their percentage they are going to receive when they decide to retire but most people do not do anything about it.Most people feel that if they start a legitimate home based business it will not work and they will be wasting their money. People do not believe in themselves and that is the reason why they do not start a home based business. The best advice anyone can give you is to start a home based business immediately and reap the rewards that come with it.You’re probably wondering why I mention a legitimate home bases business. The reason is, is because you have to pick a business that is real and is not a scam. I will be the first to admit that there are a lot of online opportunities that are scams and you will waste your money.Here are 5 reasons why you should have a legitimate home based business.1. Tax savings: You will save hundred if not thousands a year on your taxes with a legitimate home based business. When you work from home you can write off many things in your home because you are working from home. Examples are mortgage, electric, internet and many more.2. Work from the comfort of your home: You can wake up and go to your office that is setup 10 feet from your bed. How would you like to wake up and be able to crawl to your office instead of driving 5-20 miles to work every single day?3. Spend time with your family: When you work from home you will be able to spend a lot more time with your family. Instead of going to your job everyday you can work from your office and see your children instead of waiting until you get home after working your 8 hour job4. Residual Income: When you are working from home with your legitimate home based business you are going to create residual income for you and your family. Residual income is monthly income that you make from others working hard for themselves as well. Leverage your time.5. Be your own boss: Start being your own boss and using your own ideas and mind to create wealth for you and your family. Why are you making someone else rich with your hard earned time? Start utilizing the same time you would to make someone else rich and make yourself rich.It is time for you to take control of your time and your dreams and start building wealth for your family by working a legitimate home based business. Residual income will set you free from your 9-5 job and now you will be able to spend time with your family.I will be perfectly honest here and tell you that it will not be easy. There is no get rich quick scheme’s that are legit. In order to follow your dreams and work from home you must work hard.Put as much hard work as you would at your job but instead do it for yourself and your business and I can promise you, you will be happier and you will reap the benefits. A legitimate home based business can be very rewarding for you and your family but you have to be willing to work hard at it..How would you like to fire your boss?

How To Come Up With The Finances For Your Home Based Business

In beginning a home based business, one thing you will have to understand is that, like many things in life, it will take some finances to getting started. While start-up costs vary, your average start-up will be just a few hundred dollars. You need to take into consideration what it is going to take to get your business started and what type of resources you have available. You will want to watch your expenses in the beginning stages of your home business so as not to let yourself find yourself unable to meet your financial responsibilities.You will want to consider some ways that will help you in your new venture while still trying to support yourself and your family. Following are some ways in accessing the finances for your home based business:Working In The EveningDoing this will enable you to ease into your new home based business. By working it part-time in the off hours of your regular job, you will be able to tackle all the tasks needed to run your business gradually. This will aid in taking some of the financial pressure off your shoulders. You will find that your free time will be minimal but remember WHY you are starting a home based business. In a period of 6 months to a year, you may be able say good-bye to your J.O.B. and have more time to spend with your family than ever before.Working Part-TimeIf you aren’t really committed to “a job,” maybe consider picking up a part-time job and then spend the other time building your home business. This may put a little more pressure on you financially but it will allow you to devote more time to the growth of your business. As always, you will need to manage your finances a little more strictly in order to make sure you don’t find yourself in a hole.Fellow Workers Equal ClientsIf you’re in a home based business, you are more than likely going to be offering a service or product that you can use to leverage with. Remember that being an independent contractor, you work for yourself. You have many fellow workers that possibly could be potential clients, or better yet, reps. This definitely would help you in getting your business on the fast track. You just want to make sure your “prospecting” doesn’t interfere with your job performance. It would not sit well with your employer.Live On One SalaryThere are many couples that have made the sacrifice to live on one salary for a period of time while the other partner works the home business so it can turn a profit sooner than later. This may be tough but is doable. In order to avoid any financial and emotional heartaches, please make sure you have set a goal in terms of a time frame to make your home based business a profit.Extra CashThere are times that you find yourself with a little extra pocket cash. You may unexpectedly get some money from resources you didn’t expect (ie., gift, stocks, inheritance, etc.) Why not invest this in your business? Every little bit that does not come out of your pocket helps in the finances of your home based business.Borrow Money This is something that many do not like to do. Borrowing from friends and family may be tough because you may not have the support that you would like. But on the other side of the coin, you may get the encouragement and support, but also you may spark an interest in what it is you are investing in. Your friends and family could be a huge source of support and encouragement throughout the development of your home business.Before spending any money on your new business, be sure to cover all bases with your prospective business. Create a business plan that includes all the details on starting and running your business and the costs associated with it. By doing some of the things mentioned in this article, you will be able to come up with the finances for your home based business.