We have briefly mentioned in our SMSF Management for Newbies series the need for a "plan". Traders are pretty good at this sort of planning function, you have probably all heard the expression "trading plan", but investors are generally pretty useless, which leaves them hopelessly unprepared when things go wrong.
So for your investing pleasure let's take the main elements of the average trading plan and adapt it for investors. An investors plan, if you like.
Rule No.1 for your Investing Plan is "write it down". Only then will you put some thought into it, have a framework you can tweak and a reference point for improvement. A good idea at this point is to go to Officeworks or similar to get some stationery. Not only does this provide you with an important excuse to procrastinate rather than actually do anything but it also gives you a good hour or two thinking about how to keep your records. When you get back from Officeworks document the following:
■Your goals. As we laid out early in the piece, a good goal for year one is to end the financial year with exactly the same amount of money you started with, plus an education. Other goals for the more advanced might be to beat the return on term deposits (the risk-free rate of return) while others might set a rather arbitrary target like 10 per cent or enough to cover living expenses for the year without the capital sum dropping. It doesn't really matter. Just any old target will do, you can change it later. I don't suggest you set the standard fund manager's goal of "outperforming the market", the market is irrelevant to you. You are interested in cash, not outperforming anyone or anything, unless, of course, your spouse runs a separate SMSF fund in which case the gloves are off.
■Deciding on the entity or structure you are going to use to trade. This is a standard part of the plan. In your case it's your SMSF, but for anyone following this plan who is not in an SMSF it's all about tax, what is the most tax-efficient entity to trade in.
■How to trade. This means how to physically put orders on. This also involves making a choice between doing it all yourself or using a full-service broker. It then involves choosing which online broker or full-service broker. Personal recommendations are the best advice here. Ask around. You are not just looking for a nice bit of software, you are looking for support. Can you call? Do they answer? Do they have administration support? Reports at the end of the tax year? A contact point? Price is the last thing you look at. I'd be happy to pay $100 a trade rather than $19.99 for the right execution and service. You'll only find out why you're paying $19.99 when the system comes under pressure. Nothing quite like drongos and server errors when the market is crashing.
■Deciding on your software and information sources. Not for execution, for research. What are you going to use to monitor the markets and select stocks? Which charting software, which price service, which newsletters. Of course, there is this great service called Marcus Today that does everything for you at a great price. You might try that.
■Deciding your trading style. Are you going to trade forex by the second or stocks for the long term? Most of you I assume are going to attempt the latter. I don't know anyone other than some highly disciplined professional arbitrage traders that make money in the long term out of the short term so I don't suggest you try. I'm guessing most of you are going to be trying to set and forget, buying for the long term but with one eye over your shoulder for the next GFC or the next Babcock & Brown. Your trading style really depends on what you can realistically fit into your life. If you have a job and kids, you have little choice but be long term. You work it out. A lot of investors try to spend a morning (Sunday) or a couple of hours one evening a week reviewing holdings and updating spreadsheets. It's a lot more fun in short bursts. Perpetual vigilance is draining. Set a routine that fits in with your lifestyle.