21 Steps to Financial Wellness

Basics for the individual investor

The world of investing is indeed a very confusing place, many are fearful of it after listening to many horror stories.? And in the COVID world, VUCA (Volatility, Uncertainty, Complexity & Ambiguity) makes everything even more confusing.? In times like these, I would like to bring everyone back to basics.? Life should be simpler right??

From the years of engaging professional and retail investors in my financial career, I have had the good fortune of learning from the best minds in the economic field where I have distilled it into a simplified 21-step guide that is applicable for both the novice and the experienced investor.?

These are guideposts for anyone to use as they choose.? I hope you will enjoy reading this and that it can help you through the mazes.? And most importantly, have a fun and fulfilling journey!

Caveat: This is a generic advice & does not represent the opinion of my current or previous employers. Always seek professional opinion prior to investing or trading in financial products

1)???? The 3 Bucket Rule – split your income into 3 buckets

• Bucket 1 – pays your bills & supports your lifestyle.
• Bucket 2 – is your savings & makes sure you set funds aside for rainy days.
• Bucket 3 – is for investing & ensures your money works for you.
• Income from Bucket 3 is again split into 3.
• My current personal allocation is 40%, 20%, 40%.? Everyone’s distribution is different depending on individual lifestyle & financial situation.? My distribution will also change from time to time.
• Over time, you should have a portfolio of investments that are working hard for you.
• Investments can be in stocks, mutual funds, insurance, property, etc.

2)???? Define your COR

• C is your Capital available, i.e., how much do you have for investing?
• O is Objective in investing, i.e., what is your desired return on investment in percentage terms?
• R is your Risk appetite, i.e., what is the maximum loss on each investment you can stomach?
• Everyone’s COR is different.? Therefore, investing in the same product at the same price and at the same time will always yield different results for different individuals.

3)???? Develop your trading or investment plan

• Nobody plans to fail.? They only fail to plan.? A sound trading or investment plan helps you develop the discipline to be successful.
• Your trading/investment plan must match your COR.
• You must always have your 2 exit prices for every trade/investment.
• This is your FLOOR and CEILING price.
• Always invest or trade with the philosophy of taking back your Capital first and foremost.? You can leave your profits in the market after you take back your Capital because it will have been risked free already.
• A simple plan could be exiting any investment when you have made 30% gains or a 10% loss.
• Recognize that you will not be right all the time.? If you have a success rate of 50%, then investments/trades based on 30% gains or 10% losses means you achieve an overall increase of 100% of your Capital over 10 trades.
• Review your plan regularly to assess if you are meeting our investment objectives.? Refine it if necessary.

4)???? Select a trading/investing advisor

• The biggest mistake for many investors and traders is that they work alone.
• Share your COR with your advisor.
• You need to work with an advisor/broker who understands your needs and objectives.
• Good advisors/brokers are professionals with ears on the ground and should know where the smart money is going.
• It’s also always wise to have a 2nd opinion.

5)???? Follow the smart money and never fight the market

• Remember, individual investors, don’t move markets…professional investors move markets.
• Know where the smart money is going into.
• The market is in a constant state of change and reflects reality, irrespective of fundamentals, news or events.
• So, flow with the market, don’t fight it.

6)???? Cut your losses

• This is your risk-based approach.? You must accept that every financial investment/trade carries a risk and you have to decide how much losses you can stomach before getting out.
• You must have the discipline to accept losses when a trade/investment turns sour.
• This will free your funds to consider better options with more significant potential.
• Getting out of a trade/investment when the market dictates a loss will keep you in the game.
• Remember, you can’t afford to lose big.
• Successful traders/investors are the ones who have mastered the art of cutting losses.
• Protecting your Capital comes foremost and utmost.

7)???? Understanding financial products

• In your lifetime, many people will try to sell you a financial product.
• Before you invest, understand the product well and know the risks.
• Evaluate if each product meets your profile and COR.
• Attend seminars/workshops, and talk to people.
• Make your own decisions, never be pressured into making an investment decision.

8)???? Do your homework

• Never put your money into something you don’t understand.
• Never put your money into a trade/investment just on rumors alone.
• Always remember your money is hard-earned & your money must work for you.
• Ask yourself – does this trade/investment meet your COR?

9)???? Maintain a trading/investment journal

• Maintain a record of your trades/investments.
• Review your records regularly against your COR.
• Analyze why you were successful or unsuccessful in meeting your COR for each trade/investment.
• Use the journal to change your trading/investment plan if or when necessary, especially when your plan consistently does not achieve your COR.

10)? Average up, average down

• Whenever you average up, you are still in the money.
• Whenever you average down, you are still out of pocket.
• So, if you’re wrong, why continue to throw good money after a bad investment/trade?
• It is also important that you do not deploy all your capital at one go.? Split it into 2 to 3 tranches to deploy.? That said, if your conviction level on an asset is high, there’s nothing wrong in averaging down.

11)? Patience

• To be successful, your strategy needs time to work.
• Very often, retail investors change their plans too early without giving it a chance.
• Many people are also seduced by quick wealth or instant returns.
• Remember – Rome was not built in a day.

12)? Ride the momentum

• It’s easier said than done as we need to remove emotions from our decisions.
• The fear is that the profit may disappear if you exit too soon.
• Your trading plan must include a momentum riding strategy, i.e., adjusting your floor and ceiling prices.

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13)? Know when to stay out

• Learning to stay aside is very important, especially when conditions are not in your favour.
• Your trading/investment journey is mentally taxing and if you have a clear trading/investment plan, it should be able to tell you when to stay out.

14)? Never fall in love

• Never fall in love with any investment product, because financial instruments will never love you back in return.

15)? Your worst enemy – your EGO

• The market is never WRONG – we are!
• Be willing to let go of your ego and admit mistakes so that you can move on.
• Understand that you are really playing against yourself.
• Listen to what the market is telling you.
• Trade/invest what you see, not what you think.
• Always remember, you are your own worst enemy!

16)? Attitude

• It’s important to have a positive attitude.
• You will be tested regularly, and the right attitude is necessary for you to succeed in the long term.
• Having a negative attitude will cause mistakes.
• Most trading/investment problems arise from taking a trade/investment with a wrong frame of mind.

17)? Psychology

• An important factor in your trading/investing journey.
• Remember that the best system in the world will be unable to help you if you pay no attention to your psychology.
• You must be psychologically fit to win in the long term.
• To do so, strong internal control is required.

18)? Greed, envy, fear

• Don’t be GREEDY – stay on your trading/investing plan and exit when you have made enough.
• Don’t ENVY when someone makes a lot of money – know that when they lose, they will lose more than you.
• Learn to FEAR the market – cut your losses when necessary because a falling market can have a very deep bottom.
• Investors and traders have polar opposite psyches.? The investor is greedy when markets are fearful, and they are fearful when markets are greedy.? The trader is the opposite because their trades are short term in nature.? Recognize the differences.

19)? Join online communities

• Listen to what others have to say online.
• Learn from others’ mistakes.
• Be sure to know when to draw your own conclusions as it is very noisy online.

20)? Read voraciously

• Be aware of what is going on around you.
• The world is now a connected village, and something happening on the other side of the world can affect your trades/investments.
• Always be aware of macroeconomic, political and risk issues.
• Learn from professionals.? Financial education is probably the most underrated and most important aspect in trading/investing.Be aware of what is going on around you.
• The world is now a connected village, and something happening on the other side of the world can affect your trades/investments.

21)? Trading/Investing is a journey, not a race

• Remember your COR.
• You will not win all the time; you just need to win more often than you lose.
• Even the professional traders in Wall Street do not average above 70% win-rate.
• Focus on your long-term objectives and review your performance regularly.
• Most importantly, learn to have fun and enjoy the journey.