8 May 2015
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Investing in the stock market can seem difficult. There’s a lot to learn and understand. Your psychology will influence your actions, good or bad.
Often a lack of knowledge and experience only adds to the challenge of turning your starting pot into something meaningful. And we’re not talking about wild claims of ‘make millions in your pyjamas’ either. I’m talking about structured, disciplined and informed investing and trading.
One of the major factors that I see time and time again that stalls growth in a client’s account is stock loyalty. Holding a stock because you think you know a lot about it, you used to be employed by the company, or have followed that company through thick and thin, has seen many portfolios implode.
I’ve seen this psychology cause many investors to sit still like the proverbial ‘rabbit in the headlights’, watching their stocks move in increments, waiting to prove people wrong from 10 years ago who said you should have sold that stock when it was 15% higher. That reluctance to sell now sees you looking at some positions that refuse to go back to when you bought them, but you still feel there is a chance it’s going to fly up 30-40% within a short space time.
At that moment you can stand up and let everyone know you were right, a moment you have been waiting on for a while.
Does the phrase “don’t worry it will come good” seem familiar?
If you’ve ever said that to yourself or others in the face of overwhelming evidence to the contrary, then you’ve experienced this. You’re actually attempting to impose your will on the markets. Unfortunately the market doesn’t listen. This is an egotistical trap that so many people can fall into, and it’s one of the most dangerous states of mind you can ever adopt.
Ever set a price target? That moment when you finally get up 30% and think YES! I did it! But what if it goes higher?
You look at the stock and all the new flow around it and nothing has changed, but you have the “hunch”…
You look back at the stock a week later and you’re up 24%, still up but not where you were, but that’s just those short term profit takers.
Now it’s two weeks later, you’re 10% up, things aren’t what they were and now that profit you wanted to take isn’t there and 10% just isn’t enough to take, but don’t worry, it will come good.
Now you’re negative and in an uphill battle to get something back from your initial investment, that 30% now seems like pie in the sky.
This is where the problem so often lies. Investing into the markets needs to be emotionless. It’s cut and dry, with no sympathy for those that bet on hopes and dreams.
The profitable investors are the ones who actually take the profits or losses according to their pre-defined parameters. It’s a simple formula that is actually a lot harder to follow than most people truly understand before they start investing.
Many growth investors will preach to hold a stock and never sell; short term traders are the complete opposite where they take small gains frequently. Not to mention, value, income, fundamental (looking into company financials), technical approaches (following charts). They’re all different. They can all work if followed with discipline and consistency.
The most successful are those who have a structured approach, a trading or investment plan with clear objectives that dictate their actions according to their pre-defined set of guidelines. Crucially they understand themselves, have control of their emotions and follow an approach that is suited to their own psychological make-up.
Some are able to balance between a numbers of approaches and are able to hold a stock for a few months or even a year or two. They don’t lose sight that this is only a stock position and that once it hits full potential it is then sold and the cash is moved into something else that has more growth opportunity.
Trading and investing isn’t easy, but it can be simple if you choose to make it so. Sell when you reach your profit or loss target. Follow your strategy. Don’t hold on dreaming for more. Don’t fool yourself thinking it won’t go further against you and wipe out your account.
Just because your company gave you these shares or you ‘have a good feeling’ about a company, it doesn’t mean you should keep them.
If you can keep the beast of attachment at bay, you’ll be putting yourself on the right foot to turn your starting pot into the meaningful asset you are working so hard for.
Does any of this ring true for you? What are your experiences? Please let me know in the comments sections below or email email@example.com
Thomas is an Investment Advisor at CSS Investments. He has been working in the stock market since 2008 and provided his clients with a structured and well balanced approach to portfolio construction and maintenance.