When investing and dealing with the market, losses are inevitable on occasion. It may be a bitter pill for many to swallow but for those who are pros to the game it is a pill that should be expected along the way.
Many people point to Warren Buffett as an example of how well the 'buy and hold' method of investing works over the long term. So while it is easy to hear those words and accept them as a reasonable investment strategy, its another thing all together to actually act on when your stock has dropped 20% during a single trading session.
If you have experienced a bear market, you know how difficult it is to stick with your original investment strategy. Should you sell now and protect your capital? Should you wait? Will it bounce? If you sell now will it bounce? Should I sell half now? Your emotions will often try and get the best of you. A good trader will control their emotions, and assess the current situation. What was the reason for the drop? Was there news released? Has the environment in which you are now trading in changed?
The buy and hold strategy requires discipline. Nerves of steel are also helpful. Most investors who risked more than they should will often head for the hills, and often make bad investment decisions along the way. Often, they will sell when they should have held, or held when they should have sold. Gain control of your emotions, and react accordingly.
If you have done your due diligence on your investment before you bought, then you should be able to weather the storm over the long term. As a matter of fact, the drop may provide the perfect opportunity to add to your position. Its important to remember that the buy and hold strategy works best with large cap stocks.
During bear markets, its perfectly normal for normally stable stocks to start to sell off. There are plenty of legitimate reasons, including, those who need to liquidate their positions (to buy a house, pay off some bills, go on vacation etc), to those who are looking to take some profits off the table. If your investment is up 50%, you too may be tempted to take some money off the table and invest it in something else. Since we don't know the motivation of the sellers, its something that we shouldn't spend too much time trying to figure out. Unless there has been news out that changes the direction of the company, its a safe presumption that the share price should continue to move higher.
We've put together 3 fundamental truths that should help you to weather the storm.
First: what you hold in your portfolio is more than a piece of paper; it is a part of a business. You own a share in that business and as a result have a stake in the prosperity of that particular business. You will find that along the way many people simply invest in stocks simply because they are going up and hope to sell before they go down below the price at which they were purchased. These types of investors are more like 'gamblers' than investors because they invest nothing solid into their holdings. What goes up must come down and these types of investors run a very real risk of loosing money on these types of ventures.
In order to be truly successful as in investor you must do two things. First, you must not let emotion rule reason. Business and emotions are never a good combination. This is no different when it comes to investments in the stock market. Second, you must be able to evaluate the business and the potential of that business completely separately from the price of the stock. Remember that even the best company in the world is a lousy investment if you pay too much for the privilege.
Second: If you are trading with the big picture or the long haul in mind then you should look at a bear market and falling prices as a blessing rather than a curse. The only times these should profoundly effect you as a long term investor is when you have an immediate need for access to your money. If you look at it from this point of view, then declining prices only really indicate a good time to purchase more stock at a discounted price (more stock for the same money).
Whether your are trading for the short term or long term, the following tips should help to improve your returns:
If you have made a tidy profit, take it. Many investors get greedy and leave money on the table for much longer than they should, resulting in a lower profit, or sometimes, a loss. You may sell too early, but its better than selling late. Just like you can never predict a bottom, you cannot predict the top. Sometimes its better to be mostly right, than completely wrong. We got into this market to do better than the average stock market. If you get a gain of 35% or more in a short time, take the money and run. If you feel the need to stay in longer, consider selling at least half.
Do not trade with less than 500 - 1000 shares of a security. If your trading capital is thin, you'll lose more money in commission than gain in successful trades.
Always focus on risk than return. This puts a limit on the amount of return you can expect. However this also allows you to sleep at night. This produces a comfort level. Never invest outside of your comfort level. If your portfolio drops 10%, are you still going to be able to sleep at night? No amount of return is worth sleepless night and friction caused by irritability just because you're nervous about losing your shirt (or 10% of it) in a sudden drop. Don't confuse this with a bad investment. A bad investment is a bad investment and should be sold immediately. However, if a 10% correction bothers you, invest in something less risky.
The biggest mistake stock market investor make is to make the current situation fit the one they bought the stock in. I've seen countless swing traders buy a stock based on the movements of the 15 minute charts, only to say well, the daily chart looks good. If the share price of your company is down, you need to reassess what is happening now. Based on the current due diligence, is this just a temporary move down, or is this part of a larger change in the trend of the share price.
There is plenty of money to be made investing in the stock market, however you will make more money if you invest without emotion, and assess the current situation to identify if the party is over, or if you have been presented with an amazing opportunity. Buy and hold does not mean buy now and look at your positions in 10 years. It means investing in solid companies, and assessing along the way. Sometimes, things change, and you have to be willing to accept the change. The successful investor can easily identify if the share price is down for a bad reason, or is down to present them with a perfect opportunity to add more shares.
Become a better investor today and learn more about stock market basics, the Alberta Oil Sands and stock market trading at 1source4stocks.com