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To say that the stock markets have been volatile lately is an
understatement. If you’re like most investors, you may be wondering
if you should stay the course or cut your losses. There are several
traits that successful investors have and understanding them will
help you increase your chances of success.
Investing in the stock market isn’t a game. Nor is it gambling.
Frankly, it’s no different than any other occupation or hobby that
you might have. If you want to be good at it you must be willing to
invest time, effort and money.
If you’re unable to do so then you are probably better off hiring a
professional to do it for you. Even then, though, it’s vital that
you learn enough to understand what the professional is doing and
why. Otherwise you won’t be able to properly oversee the manager.
There is a big difference between a casual investor and a successful
investor—rarely is the casual investor successful. Here are the
major differences I see in approach taken by casual and successful
investors.
Successful investors understand the markets that they invest in.
Successful investors are students of the market. Their first
investment is one of time. They read about the relationship between
stock prices and the economy. They know that different types of
companies perform best in different parts of the business cycle.
They know the advantages and disadvantages of investing in large
companies versus small companies; foreign versus domestic.
The casual investor just has a cursory understanding of what causes
the market to move. Since their knowledge is limited, they are much
more easily swayed by the talking heads on television or the latest
stock tip. Knowledge is what allows the successful investor to wade
through the volume of information and sift out what is relevant.
Successful stock market investors start by developing a plan.
In the military it’s called a Battle Plan. In business it’s called a
Business Plan. Successful investors have an overall plan that guides
their decisions. They may focus on short-term or long-term trends
and develop plans of how to profit from them. Before they enter a
trade they know the conditions under which the investment will be
sold. They have identified the strategies and techniques that will
be used. For instance, buy and hold might be used on some
investments, indexing on others and trading techniques on the rest.
They’ve decided how much they will have in foreign versus domestic
and they know the maximum they will invest in each position.
The casual investor doesn’t have a plan. They make decisions based
on what is happening that day or that week. They often aren’t sure
of the strategy they will use in managing the investment. Each
investment should be part of an overall plan.
Successful stock market investors aren’t afraid of losing money.
Casual investors feel they must make money on every trade. Not
successful investors. Successful investors realize that they will
lose money on some trades. They may even lose money on more trades
than they win.
Successful investors recognize that the key is to make more on their
winning trades than they lose on their losing ones. Whereas the
casual investor might hang on to a stock too long in hopes of making
money or breaking even, the successful investor is willing to take
the loss. The decision to take a loss, though, isn’t based on
emotion, but on the principles in their overall plan.
Successful stock market investors control their risk.
Successful investors utilize various methods to control their risk
of loss. First, they limit the percentage of their portfolio that
they will invest in any one stock. Then they may make use of
stop-loss or trailing stop-loss orders. They might hedge by owning a
non-correlating asset or by buying a put option. And the methods
used are determined by their overall plan.
Casual investors often don’t even know how to measure their risk.
Successful investors analyze their winners and losers and seek to
continually improve their techniques.
They aren’t married to any single method. They recognize that just
because something worked today doesn’t mean that it will work
tomorrow. They don’t allow a losing trade to throw them off course.
Each one provides valuable experience they can apply in the next
trade.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com.
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