Investors by definition make more failed trades than successful ones, so it’s crucial to stick to the fundamental rules, e.g. cut losses quick, but let profits grow. Execution needs strong discipline and pushing aside one’s emotions. A New Year is a good moment for investors aware of their mistakes to keep improving and perfecting their trading skills.
Making resolutions every December or January is a popular habit, as a beginning of a New Year marks a restart, a refresh, old baggage left behind and forgotten, and conscious of their shortcomings people want to try again to improve. However for investors a New Year is nothing but a change of data, while their gains and losses prevail, their portfolios need constant attention, and every trading day brings new opportunities and risks. But even in such continuity, investors may stop for a while and rethink and reflect on their results, to perhaps better control their everyday decisions.
Be humble when you are successful
2017 had been another very good for stock and cryptocurrencies investors. On stock markets 77% of investors made money, which is rare and leads to the growth of greed, vanity and selfishness among them, which eventually is a key reason of failing later on during downturn. Every bull market shall end sometime and change to bear market, when most people lose money. But they don’t lose it overnight – instead they suffer small losses one of a time, for a long time. Every day of keeping a falling stock is a loss of money and a bruise on character. Most of people are frozen and unable to sell, hoping that the stocks will rebound. They were right to keep the stocks for so long, that they can’t accept the idea to be wrong. Their greed and egoism holds them back from taking rational decisions. Later, when the capital has shrunk significantly, these emotions convert to breakdown and despair. But it’s too late. Thus you should stay humble, caring and respectful especially when you’re on top, making tons of money and feeling you’re ruling the world. This is a resolution one should take despite of their occupation.
Review your results often
Annual and semi-annual reports are mandatory for stock listed companies and mutual funds. Often it’s practised to release quarterly reports of various sorts, sometimes even monthly reports on sales. But an individual investor is not regulated or obliged to review or report his own results to anyone, ever, except the taxman once a year. Many investors then rely on their feeling and don’t care much of short term results, especially when they’re not great. It is a big mistake. One should always review and reflect on their achievements and failures, often. As an investor your goal is to increase your capital over time: year on year, quarter on quarter, month on month. The return is your fee for taking investment risks. So if you are losing capital instead of growing it, you must at least be conscious about it and act on it. Even if you are not losing capital over time but not gaining, you are doing something wrong because you expose it to risk of loss. Only when tracked and assessed regularly you can face your outcome. This is a resolution one should make despite the needed effort and emotional baggage: either to adopt regular assessment routine, or employ someone to do it.
Benchmark your results
How much is enough? How little is too little? To get your results into perspective, you should compare your results to benchmarks. The most popular benchmarks are stock market indices, which you should look at according to the currency mix of your portfolio, to properly adjust for currency exchange rates’ effect on returns. For instance, if you keep 80% of your stock investment in US companies and 20% in British companies, you should calculate a weighted average of Dow Jones Industrial or Standard & Poor’s 500, and London Stock Exchange’s FTSE250 – therefore adjusting for change of USD/GBP exchange rate which by the way deviated significantly after Brexit.
The second most popular benchmarks are results of mutual funds, investment banks and other publicly available statistics of managed collective investing schemes. However you need to look at the funds which reflect a similar allocation structure to your portfolio, because you need to compare results as the same or very similar level of risk.
The third approach which is reasonable is to look at passive instruments like Exchange Traded Funds (ETF) which mimic movements of indices. As a result, If your rate of return is worse or not better than this of ETF, your time spent on managing portfolio is lost, or at least not valuable. You may be a novice investor looking to develop and gain experience during trading, but if still after many years you can’t beat a passive instrument, you shouldn’t probably be investing at all. This is an important resolution to make: act on the result of assessment. Don’t push it. If you’re not a talented trader, look for your talents somewhere else, otherwise you’d be losing time and money.
Stick to fundamental rules of investing
Whatever you decide to do in the coming year, make sure you don’t lose sight of the cardinal rules of investing. They always work, despite investors love to forget about them in good times and in bad times, driven by emotions. When ecstatic or desperate, try to remember that the market is just a trading board which knows no good or bad. It’s not there to harm you, only you can harm yourself if you don’t stick to the rules.
Financial assets are claims on real assets
Stock trading and any trading on exchange involves various forces and sentiment, leading to bull and bear market periods, in which the market overvalues and respectively, undervalues assets, sometimes extremely. While markets are volatile and unpredictable, there are underlying assets for every instrument (or at least, there should be). If you can predict what may happen in a particular sector or to a particular business’ value over time, the market will sooner or later reflect this in pricing. However you must stay liquid, thus give yourself plenty of time: don’t take debt, don’t use money you need, don’t rush it. This is an important resolution to make: stay reasonable.
Diversify everything
Never put all eggs into one basket, whether at work, with career, involving in startups or in investing. You must have a portfolio of asset classes from real estate to currencies to stock and bonds, to cryptocurrencies. In every asset classes you should also have a set of instruments, not just one. Of course don’t overdo by taking dozens of instruments on board. Two-three real estates, two foreign currencies, up to five-six stocks, two-three bonds is all you’ll ever need to diversify your risks. However look how much time and effort it takes to manage it. Instead you may opt for passive investing such as real-estate funds, ETFs, monetary funds and bond funds. But even then it remains a part-time job to track and manage it. It is an important resolution to decide, if you don’t want to spend time and effort on your investment, you should look for opportunities somewhere else.
Cut losses quickly
Investors operate in hostile environment, under time stress and lack of information. Thus many bad decisions are taken, which occurs quickly. You should then cut losses on non performing instruments and move forward. Learn to take small losses until you start gaining – but then allow profits to grow for as much as they can, then sell off and walk away, moving to a next investment. Otherwise you will lose money instead of making money. It’s an important resolution to make: approach every investment professionally, and walk away with no remorse and no emotions. Don’t ever judge yourself by your decisions. And don’t you ever think superior of yourself. The market can badly punish those who developed a high self-esteem.
Stick to what you know
It’s never enough to repeat that you should not involve into investments you don’t understand. Or it will cost you to understand them, it may be too late however. Even the smartest investor without a capital cannot generate returns. Thus protect your capital and remember, that investing isn’t for everyone. Contrary, perhaps 5% of active investors are talented individuals who can make money in long term. So if you find yourself in the remaining 95% too often, be honest to yourself and stop generating someone other’s return.
