Having an investing game plan is important if you want to accumulate more wealth. With an investing game plan, you will stress less and execute winning financial movs more often.
Violent stock market corrections of 10% or more happen almost every year. Sometimes, we'll see a whopping 30%+ decline like we did in March 2020.
Doing nothing is considered one investing game plan. But doing nothing because you couldn’t be bothered to think about how scenarios might play out is lazy. It’s better to be lucky, than good. However, what if you’re neither?
Since writing the post, Stock Market Meltdown Implications For Everyone, many of you have asked for specific advice on how to deploy your capital into the markets. Given everybody's financial situation is different, I'm just going to suggest a five step framework, and use myself as an example.
I've lost a ton of money in the markets before, having invested during the Asian financial crisis of 1997, the dotcom bubble of 2000, and the economic collapse of 2008-2009.
What has helped me get through difficult investing periods is simply coming up with an investing game plan to account for different scenarios. The fear of investing gets minimized, and rational action takes over.
How To Create An Investing Game Plan
Here are five steps to creating an investing game plan to help you good times and and times. It is during good times when we need an investing game plan the most. Because once the bad times hit, we will be prepared.
An investing game plan is similar to an investment thesis everybody should create before putting any money to work. Regularly review your investment thesis to ensure it's still intact if you want to keep holding.
Step 1: Figure Out Your Liquidity Need
I currently need at least $30,000 in the bank to feel secure. Any more than $30,000 feels like I'm wasting opportunity to invest somewhere since money market accounts pay almost nothing. Any less in the bank, and I start to feel uncomfortable just in case a financial catastrophe happens. My liquidity need has fluctuated between $10,000 – $100,000 in the past mainly due to job security and upcoming expenses.
Once you figure out your minimum cash need, you can implement an investing game plan with the money above your minimum. A good minimum liquidity benchmark is six to twelve months worth of living expenses.
You can currently get a pretty good online savings rate with CIT Bank to park your money. The other way is buying 3-month treasury bonds.
Step 2: Assess Your Current Position
Based on my neutral view on the stock market at the time, as a new year's goal, I accumulated $70,000 over my $30,000 minimum liquidity need. My current overall stock / bond allocation is roughly 70% / 30%.
Meanwhile, my public market investing portfolio (as opposed to private equity and venture debt) makes up roughly 21% of my overall net worth. My comfortable net worth allocation range in public markets is 20% – 30%.
Figure out how much money you are willing to invest beyond your minimum liquidity need. Analyze your current equities / fixed income split. And calculate what your total public market investment exposure is to your net worth and adjust accordingly.
Check out the proper asset allocation of stocks and bonds by age to help with your investing game plan. At least from a public asset portfolio perspective, my post should help.
Step 3: Reaffirm Your Investment Horizon
My investment horizon is 22 years, or age 60 for both pre-tax and post-tax investment accounts. The idea is to match the minimum age at which I’m able to withdraw money from my 401k, SEP-IRA, and Solo 401k accounts penalty free with my after tax investments. The hope is to never need the money due to existing cash flow from other income streams. But one never knows and I will reassess when the time comes.
Any time horizon longer than 10 years should help investors become more disciplined. I’ve found that if your investing time horizon is less than three years, you become either much more risk averse or too risk loving. With your main investment portfolio, it's wiser to shoot for singles and doubles.
The longer you can stretch your time horizon, the less concerned you will be about market meltdowns. Reaffirm your investment horizon. If you have young children, then you can really stretch your investment horizon by decades. For example, my wife and I are regularly contributing the maximum gift tax exclusion amount per year in our children's 529 plans. We're fine if the market sells off because our investment horizon for the 529 plans is over 15 years.
Step 4: Divide Your Excess Capital Into Multiple Tranches
If you had unlimited ammunition to buy, you’ll eventually be able to pick the bottom. This is one of the basic goals behind Dollar Cost Averaging. Once every two weeks or month, deploy a certain percentage of your disposable income into an investing portfolio in hopes of buying some shares at lower prices.
But if the stock market is collapsing by 5%, 10%, 20%+ in short periods of time, you might as well become more aggressive in your Dollar Cost Averaging approach if you have a long investing time horizon. This is where you should consider creating at least three super tranches to purchase securities with the capital beyond your minimum liquidity need.
I’ve been investing $5,000 – $20,000 a month in the market since leaving Corporate America in 2012. The $70,000 in extra capital is divided into five tranches of between $10,000 – $15,000 each to deploy into the market. This capital is in addition to the monthly $5,000 – $20,000 deployments.
Step 5: Create A Capital Deployment Plan
Armed with five tranches of up to $15,000, I plan to deploy each tranche after every 2% or greater downward move. I use 2% or greater downward moves as a signal for excess capital because major indices generally move up or down by only 0.5% the majority of days.
Furthermore, with five opportunities to buy at -2% or greater, I’m making an implicit assumption that I think with a high probability the stock market will correct by at most 10% and then flat-line or begin to recover again.
If the S&P 500 only corrects by 1% or less, then I will not be deploying extra capital. I'll simply continue my normal $5K – $20K a month dollar cost averaging plan and sit on excess capital until better opportunities arise. If the S&P 500 corrects between 1-2%, then it's a judgement call. Maybe I'll invest just $3,000 in extra capital.
Let's say the S&P 500 corrects by 5% to 1,900 from 2,000. I'm still allocating a maximum of $15,000. If the S&P 500 recovers all its losses the next day, and then loses 5% again back to 1,900, I'm not investing another tranche. Instead, I'm waiting for another 2% correction from the 1,900 level to 1,862 or lower before deploying more capital.
How I'd Invest $250,000
So far, I’ve deployed $40,000 of the excess $70,000 capital into this 10% – 15% correction. I didn't expect to invest the money so quickly, but I'm just following my system. As you will note, the market corrected beyond my expected 10% correction at one point. By having five separate tranches to invest, I've saved myself some ammunition if the stock market corrects even further.
Nobody can accurately predict the future. But we know over the long term, the stock market moves up and to the right. Therefore, it's strategically a good move to keep on investing for as long as possible.
Here's a detailed post on how I'd invest $250,000 in today's market. With the 10-year bond yield at 17-year highs, I'm investing much more conservatively now with the majority of my capital.
Follow Your Investing Game Plan
Your investing game plan must include how much to invest in what type of investment over a certain period of time. That, or when a stock or particular index sells off by a certain amount.
Where I’ve blown myself up is when I’ve gotten too cavalier with my investments. For example, in my younger years, I might have deployed all $70,000 during the initial 3% correction and have nothing left to buy during the subsequent 9% – 12% correction. The system keeps me disciplined, and your system will as well because it reduces emotion.
I'm a big believer in investing in growth stocks when you are younger. However, once you are over 40 and/or have a sizable capital base, investing in growth stocks when valuations are at all-time highs becomes more risky. Hence, it may be better to invest in dividend stocks for passive income or real estate.
The most important thing every long term investors should do is come up with an investing game plan today and stick with it over the long run.
If you keep on investing on a regular basis, the amount of money you can accumulate over a 5, 10, 20+ year period will be enormous. It’s the undisciplined who wake up years later wondering where all their money went.
Watch Your Wealth Grow
By investing $5,000 – $20,000 a month since June 2012, a brand new portfolio I created at the time is now over $500,000 three years later. I call it my “Unemployment Fund.” The idea was to see how much I could grow a portfolio from scratch with no job, just my passive income streams, and an online business that generated less than $100,000 a year in revenue at the time.
I encouraged a personal finance client to join me in creating a new Unemployment Fund of her own in 2012 because she wanted to eventually leave her soul-sucking job as well.
We motivated each other, and her portfolio is now over $300,000 while earning less than $150,000 a year. By accumulating this amount, she got the courage to engineer her layoff in 1H2015 and become a rockstar freelancer instead!
Losing money in the stock market feels terrible. But if you come up with a tailored investing game plan and stick to it, you'll be able to drastically minimize the anxiety of stock market investing. Your portfolio will likely grow larger than if you didn't have a plan and you'll have a much greater appreciation for money as a result.
Invest In Private Growth Companies
Consider investing a minority of your capital in private growth companies through a venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Manage Your Finances Carefully
In order to optimize your finances, you've first got to track your finances. I recommend signing up for Empower's free financial tools so you can track your net worth.
The tool will also help you analyze your investment portfolios for excessive fees. Finally, run your financials through their amazing Retirement Planning Calculator.
Those who come up with an investing game plan build much greater wealth over the longer term than those who don't!
Related post: How Much Savings Should I Have Accumulated By Age?
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