Tag Archives: trading

Short-term Investment Decisions can hurt your Long-Term Portfolio Returns

Posted By |

While short-term investment decisions can look like the best way to profit in the stock market, we feel that a better strategy by far is to buy top-quality stocks: stocks that will gradually accumulate stock market profits over decades.

And because you’re investing for a long period of time, short market fluctuations will have very little effect on long-term gains. That makes for a less stressful term 30 (not to mention successful) investment strategy.

Short-term investment decisions can lead to premature selling

There is no denying the immediate appeal of taking a fast profit. However, most successful investors find over long periods that much of their profit comes from a handful of their best investments: stocks that went up much more than they ever expected. If you are too quick to take profits, you’ll wind up selling your best picks when they are just beginning to rise.

Even the best short-term investment decisions will cause you to miss out on the benefits of compounding

Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long term, and lift the overall returns on your portfolio.

This compounding principle applies to equity investments like stocks, not just to fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including reinvested dividends), the value of your investment will grow more quickly. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Additionally, you can’t expect to earn an outsized return on a risky investment in your portfolio indefinitely. Instead, focus on making steady gains over time with mostly conservative, dividend-paying stocks.

Making short-term investment decisions that cause you to miss out on big gains

To succeed as an investor, you need to get used to the idea that short-term declines come along unpredictably. And just as important, you need to be careful that those short-term fluctuations don’t prompt you to make ill-advised short-term investment decisions—decisions like getting out of the market in anticipation of a further decline and then missing out on a big rebound.

Before making short-term investment decisions, remember that the highest long-term returns will come from following our three-part Successful Investor approach

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Bonus tip: Short selling is one of the short-term investment decisions that we think will cost you money

Short selling stocks involves selling borrowed shares in hopes of a drop in price. We advise against this strategy, mainly because of the perennial drawbacks of short selling. Continue Reading…

Review: The Disciplined Trader

Posted By |

81o4jz+QTgLI am not and never will be a “trader,” in the sense of a full-time stock-picker/market-timer.

However, on the suggestion of my financial advisor, I recently ordered and read a copy of a classic trading book called The Disciplined Trader, by Mark Douglas (New York Institute of Finance, 1990).

Personally, my main interest in the topic involves hedging downside risk:  taking actions that limit some downside, at the expense of some potential upside. What surprised me about this book — which bears the subtitle Developing Winning Attitudes — is how much space was allocated to psychology and mental attitudes. In fact, fully all of the third of the four major sections is devoted to what I would call “softer” topics like understanding the nature of the mental environment, how memories, associations and beliefs manage environmental information, managing mental energy and similar topics. Continue Reading…

The 7 most common trading mistakes

Posted By |

By Alana Downer

Special to the Financial Independence Hub

With the ever-increasing popularity in trading, be it stocks, Forex or cryptocurrency, more and more people are becoming involved. Some are getting rich while others find themselves learning the hard way. Of course, beginner mistakes are almost inevitable when a new trader enters the market, but with some research and careful planning, some mistakes can easily be avoided. Here are seven of the most common trading mistakes you should recognise and avoid in 2018.

1.) Catch a falling knife

As a new trader, a common mistake is thinking that a dip has run its course. A common mentality, especially in crypto trading is to “buy the dip,” however just because an asset is cheap, be it stock, a forex trade or cryptocurrency, doesn’t mean it can’t get cheaper. Many people buy in, anticipating a reversal, only to see the price drop further.

It’s much better to have a “price confirmation” approach, where you wait for the market to reverse before you enter. To do this effectively, you need something that can be objectively defined such as a price moving above an average or the completion of a head and shoulder pattern.

2.) Holding on to losing trades

Another popular crypto mentality is to “Hodl”, which is simply a misspelling of hold. This isn’t exclusive to crypto, however, and most new traders have likely lost money this way. A trade going against you, especially as a new trader, never feels good and instead of getting rid of it, as you may have planned, you hold on to it, hoping it will reverse.

One simple tactic to avoid hanging on to a losing trade is to ask yourself “would I enter this trade today, at this level?” If the answer is no, it’s probably best to get rid of it.

3.) Listening to hot tips or FUD

The internet, your friends and your family may be full of advice and “hot tips.” Trade recommendations for all markets can be found everywhere. The rumours might be right, or they might be horribly wrong but it’s important to remember they’re just rumours. Do your own research, and decide if it’s something you agree with. At the end of the day you’re trading with your own money, so your choices need to be your own.

Similarly, there can be a lot of fear, uncertainty and doubt (FUD) floating around in today’s climate of viral and fake news. Again, do your own research and learn as much as you can about any recommendations you are following.

4.) Taking uncomfortable risks Continue Reading…