The process of deciding what you want is, to me, vital to building discipline. In other words, this is the "why." As an investment advisor my first question to a potential client is, “Why are you investing your money?” The motivation behind your action will define the discipline you apply to your action. Example, when I was growing up my father told me to mow the lawn every weekend. When I ask why, he always replied, because I said so. As you can imagine, the conversation never ended there, but I ended up mowing the grass and my motivation was to avoid trouble with my father. This of course ended with the job done not being exactly the best quality I could produce. In other words, the motivation wasn’t sufficient to produce the best possible results. Investing is no different. What do you want from the process of investing. If the motivation is sufficient you will take the time to learn how to invest. If not you will be inclined to hire someone like me to do that for you. Understanding this choice is the first step to becoming a good investor.

Let’s go back to the why. Why are you investing? There are endless reasons to invest your money, most of them result in something you want that will provide you a better lifestyle. This can be a new home, new car, education for your children, retirement from your job, or ability to give to charity. The reason is not mine or anyone else’s to determine. That is your choice and yours alone. If you invest in a 401k plan because everyone else tells you it is a good idea, your commitment to the process will erode and you will eventually stop, lose interest, or spend the money on something other than retirement. So, make the goal yours and commit to making it happen. For argument sake, let’s take a simple goal such as retirement. You need $100k per year. You have 10 years until you want to retire. You currently have $500,000 saved and you are contributing $500 per month to your account. Based on this scenario you need to earn approximately 10% per year to accomplish the goal . Now we can evaluate the process of trading/investing for this objective.

What do we want? To retire in 10 years. What rate of return do we need on our money in order to accomplish the goal? 10% based on a simple calculation. Now we have the parameters for investing the money. In other words the goal of the portfolio is a 10% rate of return. We now have to build positions that will accomplish that goal in aggregate. This means we can have some investments that return 5% if we have an equal amount that return 15%. We are not taking control of the process of managing our portfolio in order to accomplish the primary objective. This process will allow you to measure the risk of each position relative to the goal. It will keep you from taking undue risk on positions because you know a loss will have to be made up in order to get to where you are going. Without getting into all the disciplines of the trading process here, the point is to understand the ‘why’ drives the decision making process, or the discipline of how we trade. Focused investing is what I have taught for more than 25 years and it creates the discipline we all need to accomplish our goals financially.

 This is part 1 of a daily educational series Jim will provide for the next few weeks, exclusively here on Greenfaucet.