In part 1 we looked at the obstacles that the personal investor must overcome, the rewards that personal investing offers and the advantages that he has over the large mutual funds.

Now it’s time to capitalize on those advantages and make some serious money!

Capitalizing on an advantage

So, the personal investor has the advantage of moving in and out of markets quickly. How does he translate that into higher returns? How can he overcome the vast analytical resources of the funds? Here are the cornerstones of a good personal investing plan.

  1. Commit to the plan

Start by making a serious commitment to becoming an expert market analyst and trader. Why? Because it’s WORTH IT!

Look – Let’s say you’re investing $500,000. Your mutual fund returns are 7% per year net of fees. That’s $35,000 of income per year. Your goal is at least 20% per year or $100,000 in annual income.

That’s a difference of $65,000 per year (more if you achieve over 20%). Wow, that’s a full-time income for many people!!! So, don’t you think its worth some serious time and effort to earn that kind of extra income? Of course it is. So, get serious and let’s make some serious money.

  1. Focus near-term

Our trading philosophy is to maintain a short-term focus on the markets. We don’t like trading longer term because it brings too many more variables into the picture. These extra variables include:

  • Significant shifts in the economy
  • Government and Federal Reserve policy changes
  • Industry swings causing industries to go in and out of favour.
  • Significant stock market swings

Besides, this short-term focus helps us maintain our trading advantages over the mutual funds. The funds lack of flexibility causes them to often ride stocks up and down the market roller coaster. The personal investor can be more nimble and avoid some of those roller coaster rides.

  1. Pick good markets

The first step toward investing success is learning to pick your markets. Why? Well consider that in a solid upward trending bull market 70% of the stocks are rising on any given day. Now also consider that in a falling bear market about 80% of the stocks fall in price.

So, the first rule is to stay invested in bull markets and in cash during bear markets. The key to this will be to develop your own set of alert indicators that warn you when to exit dangerous markets and give you the green light when it’s safe to return.

  1. Pick sectors that are in favor

All companies and their stock are divided into industry sectors. Depending on how the analysts view an industry’s prospects will determine whether a particular industry is in or out of favor with the mutual fund managers. The fund managers tend to put their money into sectors that are in favour while ignoring those that aren’t.

For the personal investor the strategy is to concentrate on favored industry sectors when choosing stocks.

  1. When picking stocks follow the funds

Look, not only do fund managers love certain industry sectors they also love the top stocks in those groups. That’s where their capital gets invested and that’s what drives up stock prices. Further, managers are afraid that another manager will get into a hot stock that they don’t own and eclipse hi/her performance. In mutual fund marketing its all above relative performance among managers so you can’t miss out on a hot stock that everyone else is invested in.

So, for the personal investor the strategy is simple. Pick from the hot stocks that all the funds are in and be prepared to exit them if the market takes a nose dive.

  1. Develop rules for everything

Do you remember those enemies – Greed and Fear? They are emotional responses and the only way to take emotions out of buy / sell decisions to develop and live by tight trading rules.

Market Rules

First, you need a set of market rules that tell you when to enter and exit the market. Basically, these might look like this:

  • Market in Confirmed Uptrend – stay invested; business as usual
  • Uptrend under Pressure – invest with caution; if re-entering wait for Confirmed Uptrend
  • Market in Correction – exit market; wait for Confirmed Uptrend before re-entering


Portfolio Rules

Next you need performance guideposts to tell you when to take portfolio profits. Here’s a sample:

  • If your portfolio is up 3%, sell all stocks and pick a new portfolio
  • If your portfolio is down 2.5%, sell all stocks and consider whether market re-entry is safe
  • If a portfolio has been active for 20 trading sessions (about 1 month) sell all remaining stock and start again. Stock picks get stale and our focus is short term.


Stock Rules

Finally, you need a set of rules that tells you when to sell or hold individual stocks. Here’s a sample:

  • If a stock is up 10% sell and take profits.
  • If a second stock is up 10% sell it and take profits. Also sell the balance of your portfolio since you have reached your profit goal. (This strategy assumes portfolios of 10 equal dollar investment stocks).

So, that’s it. You now have a tight rule based personal investment system. Your system should be able to yield returns of at least 2% per month and therefore targets annual returns of over 24% per year.

Remember, this is a very important part-time job worth $50,000 to $100,000 per year and therefore deserves all the time and attention that you will pour into it.


D.A. Campbell

Island Equity Systems designs and markets equity trading systems for the personal investor

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