You'll be able to form your own opinions about stocks so that you are less influenced by prevailing market trends. |
| Day 10/10: Tying it all together |
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At this point, you’ve built a comprehensive knowledge base to kick off a successful investing practice. You have a goal, a place to invest and an understanding of various investing strategies. You’ve also learned the ins and outs of financial statements and had some practice using financial ratios in analyzing dividend stocks. Now we’ll return to the question of emotional investing and how to minimize it.
In this section, we’ll pull together many of the concepts we’ve already covered. At the end, you should feel confident that:
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On Day 2 of this course, we discussed the problem of the herd mentality in investing. As a reminder, following the masses can often lead to poor trading decisions that ultimately reduce your long term results.
The five strategies below can help you resist the urge to buy or sell because that’s what everyone else seems to be doing. Use them to make independent decisions that suit your own investing needs and goals. |
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| 1. Look Beyond the Numbers |
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| The right investments for you will meet your technical requirements, of course. But you should also look beyond the numbers to evaluate those prospective stocks. Questions to ask include: |
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| 2. Keep Enough Cash on Hand |
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Cash savings protects you from a liquidity crisis. Without that protection, you'll be tempted to reach into your investment account when you're faced with a financial emergency. If you do that when the market's down, you'll realize losses, which only compounds your financial issues.
Liquidating at a profit isn't always the outcome you want either. For one, you'll incur capital gains taxes. You'll also reduce your future gains potential because you have less money invested going forward.
Protect your investing results by maintaining ample cash savings. Most experts recommend enough to cover at least three months of your living expenses.
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| 3. Invest for the Long Term |
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If you’re going to invest, you will experience market downturns. It's wise to accept that you cannot predict when the next bear market will happen or how long it will last. You're better off assuming it can happen at any time and may last for several years.
You can build those assumptions into your investing process by investing for the long term. Don't expect gains next month or next year—that may leave you disappointed. Instead, look to build your wealth in the stock market over decades. The downturns that happen between now and 20 years from now are only part of the process. |
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| 4. Define Your Exit Parameters |
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At some point, a stock won't be performing the way you expected, and you'll think about selling it. In this scenario, having defined exit parameters can help you make this decision rationally rather than emotionally.
Exit parameters are the reasons why you'd close a stock position. They might include: |
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| If you're taking the long term view on stocks, make sure your exit parameters are also long term. For example, a fundamental change in the company's business will affect the stock for the foreseeable future. But a one-time production disruption or a bear market will not. These are temporary problems, and you should not base long term decisions on temporary issues. |
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You will make investing mistakes—everyone does. Use those mistakes as learning opportunities. Evaluate what went wrong so you can improve your investing process over time.
A common mistake is underestimating your own risk tolerance. Let's say you invest aggressively to start. Your rationale is that you're young, you have decades to build your wealth and you can accept volatility now in exchange for higher returns later. But when you see that volatility affects your account balance, the fear of losing money starts to rattle you. You wonder whether you should be investing at all.
It's tough to make money in the stock market when you are constantly fighting the urge to sell out. Unless you make a change, you'll eventually give in. And that will undercut your long term returns.
In this scenario, you'll be a better investor going forward if you recognize there's an issue, note the lesson learned and adjust. You can take a step back and commit to overlooking tough market cycles. Or, you can shift into a more conservative asset allocation.
Note that you don't have to sell anything to shift into a more conservative asset mix. Simply change the composition of your new investments. This way you can shift your portfolio gradually, without incurring unnecessary losses. |
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| Finalize Your Investing Process |
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| You now have a solid base of conceptual and technical knowledge to support your investing practice. To recap, here are the steps needed to set yourself up for success: |
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Begin today and you’ll have more time to build wealth through compounding. Twenty years from now, you’ll look back and remember this as the day you took charge of your financial future.
We hope you enjoyed this course—and learned a great deal. Please take a minute and answer a few questions that will help us make it even better.
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