- Following the Herd
The statue on Wall Street is a charging bull, and could also symbolize people just being blindfolded and following the herd. That is something that affects traders from time to time. Let’s say a stock or an asset class such as gold or real estate starts to rally, investors pile in thinking it’s the golden ticket to wealth. But normally by the time the news gets around via word of mouth it’s already too late to make some considerable profits. The longer something rallies, the more keen people are to buy, and that might be a problem, because the stampede might be well and truly over by the time you get in.
To avoid losses, Warren Buffet once said you have to take risks in this world to get anywhere. Sometimes what the average investor sees as risk, is just volatility in the markets. You will get days, that the market hardly moves, then you will get news announcements where the market whips back and forth and makes people sea sick. Although a volatile market can be frightening. The real danger is going to be too afraid to pull the trigger on a trade. That will mean you will lose buying power permanently.
- Hanging on Too Long
It’s hard to know when to sell. I am sure you have been this situation. You are in profit and maybe in some very large profits, and greed gets the best of you. Once a stock goes up, you think things can just get better each and every day, only to see your huge profit dwindle back down to nothing and turn into a loss.
This is quite common as an investor. Every once and a while you will buy something and become psychologically attached to it. Let’s face it, if you own a lemon, it’s going to leave a more sour taste the longer you hold on to it, so for the better part, it might be better to get rid of it sooner rather than later.
- Not Rebalancing
This is a very important aspect to ones trading account. The performance of your different investments might differ. Let’s say you have 50% in stock, and the other 50% in bonds. The stocks gain 25% and the bonds stay the same. You will end up with 55% in stocks and 45% in bonds. So letting your portfolio get too far out of hand will increase risk, and will not meet your investment needs and goals over the long run. This can potentially put you unintentionally at more risk, than you might have been willing to take from day 1. So every 12th month sit down with your stock broker or someone who can assess what has happened and re-plan and rebalance things if need be.
- Making Things Complicated
In reality, if you own more securities you take on more risk. With each rise and fall of the market, your portfolio is going to act like an index fund. To increase your profits, you do not need to enter more positions, because that will only increase your time, brokerage fees, and energy needed to manage your accounts. The most successful investors are people who do not complicate things. They have a simple plan, and execute their plan effectively without too much messing about.
- Stop Losses Are Key
Traders who are unsuccessful are traders who usually do not use stops. This basically means, when they enter at trade, they always think the trade will go in their direction and thus in turn think they do not need to give themselves insurance or use a stop loss. Stop losses are so critical because every now and then, a position will turn against you, and that means you need to either opt out of the trade, or minimize your position. Doing so will ensure you are protecting your capital and you have what’s called ‘longevity in the market’. Meaning you will always have money to trade with, and never expose your account to gigantic losses.
- Not Sticking To a Plan
The greatest sin of them all is when an investor fails to stick to their basic plan. You have to remember that the purpose of investing is to generate wealth, swiftly without putting your future at stake. If you do not have a plan, you will not know if you are on the right track. But not sticking to your plan, once a plan is formulated and in place is like walking through a minefield blindfolded. It’s mandatory in this day and age with a very volatile market conditions to have your goals set in place and a time horizon to know what steps to take, in order to succeed.