Why you should use investment checklists and a written plan

Most stock pickers don’t use investment checklists or follow a written plan which they can improve over time. I think that’s a big mistake, and it’s probably one of the biggest reasons why the majority of private investors underperform the market.

Checklists and plans are commonly used in complex, risky projects

Instead of building a portfolio, imagine you’re building a house.

The first thing you might do is think about what sort of house you want.  That would take quite a bit of thought, and you’d probably discuss it with other people to bounce ideas around.

Eventually, you would settle on a high-level goal defining things like number of bedrooms, square footage, how many floors, building materials, overall style and so on.

Then you would go and speak to an architect who would, in discussion with you, draw up far more detailed plans.

Although there may be some unique features in your house, I would guess that significantly more than 90% of your plans would be based on the architect’s years of training and experience, which in turn are built upon centuries of accumulated knowledge.

How much training do architects need?  According to the Royal Institute of British Architects:

The typical route to qualifying as an architect in the United Kingdom is a combination of academic studies at a university and practical experience. It involves training for five years at university and completing a minimum of two years practical experience before final qualification.

Architects have hundreds of processes, rules and guidelines to help them. Of course, your house is unique, but it will still be designed primarily using ideas and features that are borrowed from the architect’s existing body of knowledge.

Now, I’m not saying you need seven years of study to build and manage your own portfolio, but it’s good to get some perspective, especially when you’re going to be the architect of your investment portfolio.

So you have an overall goal of what you want, you have an architect, and you have your detailed plans.  The next step to building your dream house is to hire some builders, and then the fun really begins.

The builders, working primarily from the architect’s plans, begin to build your house.

They follow the plan as best they can, given the inevitable gap between plans and reality.  For each task they perform, they, in turn, have their own set of procedures, rules and best practice guidelines to work from.

How well they stick to those procedures is another matter.

The more closely they follow best practice, the more likely it is that the house will be finished to a high standard, strong enough to face the best and worst of British weather for centuries to come.

But if the builders do a bad job by cutting corners, using incorrect or out-of-date techniques, or just applying best practice poorly, then the finished house is unlikely to match the dream house that exists in your head.

At every stage, the methodical application of a pre-defined process – a plan – is required to lead the project towards a successful outcome.

Of course, the real world will occasionally throw up some curve balls; completely new situations where experience, gut feel and intuition are required; but for the most part, that’s not the case.  For the most part, it’s the diligent application of a plan – one that has been honed through years of theoretical and practical experience – that gets the job done.

How building an investment portfolio is like building a house

What’s true of building houses is true of just about any task or project.  There is even a right way and a wrong way to hammer a nail into wood.

As an investor, you are the architect, project manager and builder of your investment portfolio.  Your job is to build a portfolio of shares that will do whatever it is that you want it to do (assuming that what you want is realistically achievable).

Whether that’s to have a capital value of £1 million within 20 years or to produce an income that you can comfortably live off for the rest of your life, your job is to design, build and maintain that portfolio.

Given the importance of your financial future, successfully building an investment portfolio is no less important a task than successfully building a house.  That’s why following a plan – one built upon decades of academic and practical experience – is absolutely essential.

Creating or improving your investment checklist

Before you lay your next investment ‘brick’, go and get your written plans and review them.

Are they up to date?  Are they still relevant?  Do you even have your plans written down?

Your plans should cover every level of detail required.  Here are just a few of the questions you should be able to answer – assuming they are relevant to you – either off the top of your head or by reference to your detailed and written plan:

  • What capital value do you need your portfolio to reach?
  • What annualised rate of return do you think you can realistically achieve?
  • What is the minimum annualised return that you will accept before giving up and becoming a passive investor?
  • How much income do you need?
  • What dividend yield do you want?
  • How long do you have before you switch from capital growth to income drawdown?
  • How much risk can you accept?
  • How much volatility?
  • How big a peak-to-trough fall are you comfortable with?
  • What is your target asset allocation, your cash, bonds and equities split?
  • How many companies do you want to hold?
  • What is your diversification policy?
  • What’s your maximum position size in any one company?
  • Are you going to rebalance?  How often, and on what trigger?
  • How often will you check up on your holdings?
  • How will your typical holding period be?
  • What sort of companies will you go for?
  • How will you value them?
  • Have you written down every step of your investment appraisal process?
  • Do you have a specific day that you set aside for your investigations?
  • What will you do if a dividend gets cut or suspended?
  • Do you know what you will do if we have another financial crisis?
  • When will you sell?  On what trigger or for what reasons?

If you can’t answer those questions, then start thinking about them.  Start writing and get the answers down in written form. Some of the answers are narrative, but many of them will be in the form of a “to-do” list or a checklist.

Write down every single step that you have to take, and update the list every time you learn something new.  Learning is, of course, a critical part of being an investor, both learning from reading and learning from your own successful and unsuccessful investments.

If you don’t have detailed written investment plans based on decades of academic and practical experience (whether yours or somebody else’s), then you are effectively building a house without a plan, and that’s an approach that is almost guaranteed to fail.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

2 thoughts on “Why you should use investment checklists and a written plan”

  1. Hi John

    I do something like this. One thing that I often find helpful is to keep a ist of mistakes that I made and review them every so often. I also review past holdings , like my mistakes often with horror.


    1. Hi Ken, yes that’s an excellent idea – review current holdings, review past holdings to see if you were ‘right’ to sell, and learn from every mistake and feed it into your process.

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