Investing is a fickle business. In this post we’ve tried to pull together some great pieces of advice that we’ve learned over the years. There are no secrets to investing fame and fortune. Instead the most successful investors are those that can avoid chasing the next huge profit and stick to the common sense ‘rules’ that are so easy to break.
1. Forget Hindsight
Forget about what ifs and if onlys. It is all too easy to look back and think about what you should or should not have done differently. The whole point of investing is to look forward and anticipate future moves and trends. Sure take some time to learn from prior successes or failures but do not focus too heavily on the past. Just because something happened in the past doesn’t mean it will happen again.
2. Paper profit means nothing
While it’s important to keep an eye on the value of your portfolio it’s also equally important to remember that you haven’t made or lost any money on a trade until you close it out. Sure a stock may double in value but you won’t have profited from the rise until you sell your stock. Bearing this in mind should make you think differently about when and how to exit your trades.
3. Face Up To Losses
Every investor makes losses, no exceptions. The best investors know how, and more importantly when, to take them then move on to the next trade. One of the most common pitfalls that private stock investors make is hanging on to a falling stock, hoping that ‘it will come back’. It’s sometimes better to take a loss now and move on rather than risk further pain on the hope of a turnaround.
Chasing losses really is a mugs game.
4. Trade The Trend
This is a common phrase in the investment world. If you take a step back and look there are always big trends unraveling in the world around us. This rule says you should identify these trends and try and get some exposure to them in your investment portfolio.
Here’s 3 examples. Look around on the high street and what do you see? Personally I see more dollar stores, a boom in tablet computers and high gas prices. Now take some time to think about who’s making money out of these things and if there are ways you can get your portfolio exposed to these. Regarding the booming tablet market a couple of weeks ago we outlined some compelling reasons to invest in Apple.
5. Buy the Rumor, Sell the Fact
Ever wondered why when a company whose stock you own releases a bumper earnings statement only for the stock price to fall 3%? Well the reason is that professional traders almost certainly buy the rumour then sell when the rumour turns to fact.
Traders earn their money by taking a view on events before they happen. You should try and do the same. If you’re too reactive to news such as earnings statements then you’ll likely be chasing the market and lose out as a result.
6. Stick to What You Know
When investing it can be all to easy to get tempted to invest in things outside your area of expertise or knowledge. Just because someone is making money from a stock or sector doesn’t mean you will. The most successful investors stick to a small number of areas where they are relative experts rather than trying to spread themselves to thin.
I am a big believe in the Warren Buffet school of thought that says you should only invest in businesses you can understand. I’ll never buy the stock of a company who’s product I don’t have some basic understanding of. Use your real life knowledge to help guide your investments. For example if you’re a video game buff take a look at the industry from an investing point of view, maybe your love of games will help you see some value or trends in particular companies that other don’t see.
7. Make Your Own Decisions
Don’t be a sheep and follow the crowd. Sure, listen to what others have to say but make sure you are strong enough to act on your own convictions. The biggest reason so many investors lost vast sums during the Tech Bubble in late 1990s was because they were simply investing in te sector because everyone else was, not because they understood the industry or business they were investing in.
All investor bubbles are the same. The recent housing bubble in the US and Europe, and subsequent credit crisis, was caused by unsophisticated investors entering the market without understanding the risks. This was true of low income earners buying real estate with finance they couldn’t afford in the long run as well as corporate investors buying huge amounts of mortgage backed securities without really understanding the risks involved.
While it can be hard to do, doing the opposite of what everyone else is doing is often a wise strategy to take.
8. Diversify Your Portfolio
This is probably the most important and easiest rule in this list to break. Do not put all of your eggs in one basket. This rule should be folowed on more than one level. For example don’t just invest in stocks, make sure you hold some of your portfolio in cash savings, maybe bonds, maybe commodities, maybe physical investments like antiques or collectibles.
At the same time if you do hold stocks make sure they are not all in the same sector – try and spread your stock picks across different sectors, maybe choosing some growth stocks which are more risky alongside some value stocks that are more reliable yet provide a steady [dividend] income to spread your risk.
9. Have An Exit Strategy
This is a very common mistake amongst retail investors. Before entering a trade or investment make sure you have a clear investment strategy. If you’re buying a stock, write down a price at which you aim to sell and take your profit. When you hit the price, by all means re-assess and consider f the stock has further to go but always start off with the assumption that you’re going to sell and take a profit.
10. Track Performance
You should treat your portfolio as a business, just like a professional would do. Most online brokers offer functionality that allows you to track your performance online. In addition I always keep track of all my trades in an excel spreadsheet. I make sure to add in any dividends I receive so I can track exactly the returns I make on any investment.
Another great idea is to set aside time each month to review your whole portfolio. Sometimes you can get so bogged down in the details of 2 or 3 stocks or trades you can lose track of the portfolio as a whole.