Seems incredible, doesn’t it? When you hear about a millionaire who “made it” in the stock market, it almost seems like magic. How do you make money buying and selling companies? Here’s what wealthy traders want you to know.
Make a Plan
You need an investment policy statement and a plan for trading. All successful investors have one. If you don’t develop one, how do you know where you’re going? Better yet, how can you know you even succeeded or are on the right track? When it comes to trading and investing, having a plan is probably the most important thing you can do.
Most portfolio values for most investors don’t go anywhere because investors jump around in their investments too much. And, they never see the increases they need to be successful. In fact, this is the basis for the Tim Sykes challenge — to get investors to think more carefully about how they trade, and move in and out of investments.
By having a plan, you can see whether you’re on track or not to meet your investment goals. And, if you’re not, you can make quick changes to that plan within set parameters.
Usually, the changes are done within an overall trading strategy. So, for example, if you have set entry and exit points, you might adjust those points up or down by 5% or 10% to accommodate market anomalies. But, you wouldn’t alter your stop-loss point because you wouldn’t want to expose yourself to undue risk while trading.
This is the difference between having a firm trading plan and not having one. Investors without a plan often panic when the market moves against them. And, this causes them to make catastrophic mistakes.
Why Are You Investing?
Believe it or not, many people don’t know why they’re in the stock market. They want to make money, but beyond that they don’t have an idea of why they trade. Have goals that are material and tangible. Because the stock market is largely a conceptual thing — it’s hard to visualize the companies you’re trading — you need to bring things down to a real-world level.
That means setting goals like planning for a wedding, or a vacation (and really get detailed about where you want to go), paying for a house, or saving for your child’s college education.
If you plan on investing for more than one goal, that’s fine but write them all down and make sure you keep track of them all.
What Is Your Time Horizon?
This is something even professional investors struggle with sometimes. A time horizon is the amount of time you expect to be investing. If you’re planning for retirement, you would want a very long time horizon, up to 40 years possibly. It all depends on your age. Most people get tripped up by this issue because they set a time horizon that takes them to retirement. But, you will likely need to keep investing well into retirement.
So, instead of setting your time horizon to end when you turn age 65 or 70, make sure you carry it out to 80, 90, or however long you anticipate living.
If you’re saving money for a home, your time horizon might be a bit shorter. And, for smaller purchases, it may be only a year or two. The general rule of thumb is that you should invest in stocks for any goal that is more than 5 years off into the future. Any shorter than that, and you would have to day trade or invest in bonds or cash investments so that you could cash out and avoid excessive transaction costs.
How Much Do You Want To Risk?
There is a wide range of risk profiles in investing. And, not all traders are risky traders. In fact, many are risk averse, and do not want to take on more than they absolutely have to. You need to decide how risk averse you are, and how much risk you’re willing to accept. If you aren’t sure what your allocation should be, you need to study risk tolerance models and build a portfolio based on a traditional or accepted model that minimizes risk first.
Then, as you gain a better understanding of risk, you can increase your risk or exposure.
Make sure you take a risk tolerance questionnaire. Focus more on the amount of money you could potentially lose as opposed to the amount you could gain. Most traders who are new take more risk than they think simply because they’re focused on making money and note preserving capital.
Niamh Howell has an extensive background working for stock brokers. He deals with stocks and shares every day and enjoys writing about industry news and articles for the beginner investor. Look out for her articles around the web at finance and investment blogs.
Categories: Stock Market