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Developing a Decision Process...a Recipe
Some decisions we make in life just seem to work out well for us. We think we are smart, but really we were just lucky. Successful investing over your lifetime requires you to make many good decisions, just plain luck is really not a part of a successful investing recipe. If you are interested in testing your luck, then go to Vegas! If you want to become an investor, you need to develop your own personal investing recipe.

Here are seven things for you to consider in developing your personal investing recipe. In each step you need to be thinking of how much Risk you are taking versus the potential Reward you could reasonably expect.
1. What is your knowledge level in a given Macro Investment Group?
2. How do you measure the quality of the mentors you selected to provide you with information on this investing area?
3. What are the investment measurements you will use every time?
4. Can you find and monitor the critical factors that will impact your investment decision outcome?
5. For each dollar invested, what is the measured Risk/Reward Ratio?
6. Do you know when to fold when you have made a bad decision?
7. Can you manage the decision process with facts rather than emotion?

Investing is about measuring the Risk of Investing your assets versus the Potential Rewards. It is about following your own (or someone else's) investing recipe every time you invest. It is about your overall win/loss percent (effectiveness) and how much of the investment's cycle appreciation you have captured (efficiency). The feedback in investing will be harsh or rewarding. You will see the impact of every decision you make. If you are a perfectionist then you are in for some tough lessons. Initially, go for good results, and with experience try to improve your effectiveness. Forget Perfection!

Diversification and Risk Management
The word diversification is continually used in the financial community. You need to think out how it applies to growing and preserving your own personal assets. We will share a basic outline below, so you can think through your asset diversification plan.

The Macro Diversification level has the most leverage and largest potential impact on your risk profile. Sector Allocation and Investment Instruments also can offer some effective ways to spread risk. Spreading risk is good...but be certain your grow and preserve plan does not turn into a part grow and part decline plan, expressed in the name of diversification.

Macro Diversification should be closely examined and used in your initial allocation decision process. Be certain that your choices do not have the impact of one Macro Investing area, canceling out the growth in another Macro area. Your investing plan is to grow/preserve, not grow/decline. All your Macro Investment Groups should have the potential to grow, while providing useful Risk Diversification.

Sector Diversification can be a good way to spread risk. Allocate your assets among several good potential sectors. If you have tons of money then set a maximum dollar limit for each industry within the sector. Individual Investment Instruments Diversification is very useful. It helps avoid company's earnings forecast blunders or some other bad news.

Mutual Fund Diversification is often poorly managed. Here's how it usually expresses itself. The investor chooses several mutual funds, based on these general descriptions. Then when everything trends down, you read in the prospectus fine print and find you own all the same companies. Do your homework up front!

In our website the investing demonstrations we use will not be addressing Diversification directly. You will always be responsible for creating your Macro, Sector, and Investment Instruments Diversification. You should always do your own Risk Management Planning to fit your own personal needs. No one knows your personal needs but you!

Covered Calls and Risk Management
Covered calls is an underutilized hedging method for managing risk. Most people do not realize that they can stabilize their account and create cash when their investments are going down. The objective of this covered call technique is to help stabilize your account and to create some new cash, as the stock goes down temporarily. For instance, a healthy investment quality stock often moves up and down as it is trending upwards. By opening (sell the contract) a covered call position, you can take advantage of this temporary downward movement. After the stock has moved down into an over sold condition, then you can close (buy the contract back) your covered call position. If we have used this technique successfully, not only do we create new cash, but we retain ownership of the original stock position. Hopefully, the investment is poised to move up again. Once it is over bought again, we can use this hedging technique once more.

Stop Orders and Risk Management
A good objective in any investing approach is to attempt to limit any major loss in your account. Stop orders are used by many to attempt to reduce this stock ownership downside risk. The first way they are used is when you have just purchased a stock. Say you bought XYZ at $50 per share. You might put in a Stop loss order at $45. This could potentially limit your investment loss to $5 or 10%. A second way to use a Stop loss order is as follows. Let's say XYZ has now moved up to $60 a share. You could move the original Stop loss order up to $55 to retain some profit.

A warning, stop orders do not always work as you originally intended. In the example above, XYZ could have moved to $54, close you out, and then turn around and go up to $70. Not a good feeling, but you still made money. Another potential problem is when a stock "gaps down" past your original Stop order. Your order may not be filled, and you are sitting in a larger loss position than you ever intended.

Again, no tool works well all the time in investing. It is about learning the tools and improve your winning percentage. Stop loss orders used in a consistent manner can help protect downside risk most of the time. But not all the time.