by Jesse Anderson, CFA
A client recently asked a great question, “What is our ‘Plan B”? I think part of the question stemmed from the idea that if we aren’t reacting to the market and its changes, we are doing something wrong. Adjusting our investments or calling an audible in the middle of the process makes investors feel good. Just like nearly every other decision, the change is driven by emotions yet investors fail to realize it. After the change, they normally come out feeling the portfolio is much ‘safer’ now, or they can make a whole bunch more money. (Fear & Greed) Rarely will an investor go back and evaluate previous decisions to decide whether or not it was advantageous in the end.
Too many investors create a ‘Plan B’ in the middle of the process and switch too soon. Instead, investors should build their ‘Plan B’ into their investment strategy when they are thinking logically and uninhibited by emotions. Generally speaking, every long investor buys a security expecting the price to increase. Few have thought about what to do when that doesn’t happen. Here are a few strategies the Snider Investment Method uses as a ‘Plan B’:
Covered Calls – Hoping for stock price appreciation is not the only way to make money in the stock market. Rather than speculate on where the stock price is going, the Snider Method uses shares of stock to generate income in our portfolios with covered calls. Each month we sell calls on our securities as a way to earn money in the middle of these truly uncertain times.
Dollar Cost Averaging – No one said you had to go all-in on the first hand. The markets will have good days and bad, and it is impossible to predict what is next. We put our capital to work over time and continually manage our exposure as markets fluctuate up and down.
Band Rule & Purchase Limits – Two rules very specific to the Snider Method, both work in conjunction with our dollar cost averaging and covered calls. The Band Rule helps us create a more consistent income from each stock over the long-term. Both guide us in making additional purchases and also tell us when to stop.
Our “Plan Bs” are nothing more than ways to manage risks. It is impossible to completely remove the risks from stock market investing, however you can implement tools to reduce it. If your Plan B isn’t working or you don’t have a plan in place, join us for our Snider Introductory Course on August 28th. In it we have a more in depth discussion about our risk management techniques as well as go over some of the philosophies and objectives of the Snider Investment Method.