Every one who self directs their investments has to make fundamental decisions that affect their household budget. But, when all is said and done, whether you chose to buy a stock or a mutual fund, the only things that are important are the prices you buy at and what price you sell at. Easy as that, right? Just follow performance and all will be good. Except, the current market is fickle and has more sell-offs than a Rocky Mountain goat trail. Holding on to your focal point can be rough.
Buy now, sell now, sell later, hold, buy later – stomach grumbling from thinking about this? You are not alone. The moment of truth for all investors happens when they click on the “buy” or “sell” button. However, etch this into your brain:
We all are capable of staying on top of our trading success with greater focus by choosing correct actions that come from a thought out game plan rather than an almost “lottery-like” dream. Gaining confidence by following your mental plan and you will reach a comfort level and confidence level that makes hitting those buttons a natural and stress free event. Of course, developing a plan that uses a lot of common sense from the start is a huge undertaking. Creating and following an action plan is, in all likelihood, the most effective way an amateur can learn to become a flourishing investor.
So what are these common sense ideas that our individual brains are able to process while creating an action plan?
1. The old Buffet Rule (not the new Buffet Rule about billionaires paying their fair share in taxes): Choose a stock that you know and like. Buffett invests only in companies that he has a sound understanding of.
2. Selecting stocks tasks is an intellectual judgment, not an emotional lottery pick. If you trade believing that you are going to get rich quick, you will most likely end-up desperate and broke. Do not even start trading with that kind of attitude because you will likely lose whatever you have.
3. Make a plan for selling and buying. Be smart – not greedy. Active investors must first determine initial buys and when to add to holdings. Your plan must include when you sell – balance risk with profit, gain or loss. If, as an investor you are in for the long-haul, commonly known as a buy and hold investor, it makes sense to have a fall back sell position or stop-loss.
4. Stay focused. Know what is happening in the markets in general and with your investments in particular. Never lose sight of your plan. While
this sounds easy, many investors will tell you it’s not. The key is to let your mind and decision-making process be the variable that you control to make sure your plan is followed. Suppose you plan on selling a particular stock when it hits $10. When you decide this, the stock is at $9.75. (You bought at $5). The next day the stock is at $9. Wait for it to come back? But the following week it skips down to $8 and is now at $7.75 – still waiting? A person who has mastered the psychology of the market would have sold at $9. This investor knows that “faith” is not an investment strategy and it will only serve you poorly. Make a plan and stick to it.