The U.S. stock market is experiencing all-time highs right now. It is an exciting time to be in the markets, but it is not without its challenges. When making investment decisions with our money, it can be a bit confusing, frightening, and time-consuming. We have the option to invest on our own, follow a friend or family member’s recommendation, subscribe to an investment service, or seek out an investment advisor.
Since the markets are at record highs, it can be tempting to jump in. Basic psychology shows that everyone gets on the bandwagon when things are popular. The masses seem to buy at all-time highs and then sell when the market goes into a correction phase, thus losing their money. You want to avoid the buy high and sell low syndrome. How do you avoid this common mistake?
I would like to provide advice which you can put into practice to alter the odds in your favor with the financial markets.
1. You are the best stock advisor
I have made this statement before and will continue to make it. You are the best stock advisor for your investments. No one is going to pay attention to your investments like you will, especially if the recommendations are coming from an advisor who works on commissions.
2. Have money management skills in place
You want diversification. Ideally, you want to only invest a maximum of 5% of your total capital available into any one investment. If you have $10,000 to invest, you would put a maximum of $500 into that one investment. With $10,000, you would purchase 20 stocks or 20 mutual funds. Many financial experts and advisors would argue against me on this one. My stance on this is simple: The pros invest this way. Do you want to be a pro or an amateur when it comes to risking your money in the financial markets?
3. Invest in something you understand
I learned this from Warren Buffett, the greatest stock investor of the century. You want to invest in something that makes complete sense to you. Everyone understands how Starbucks, McDonalds, and Apple work. You can easily purchase shares of these stocks on the markets. You don’t want to put your money in complex investments like Japanese Yen Futures or CBOE Mini-NDX Index Options if you are not a math genius, don’t stay current on world economic news, and you can’t stomach the volatility. Invest in something you completely understand. There are so many resources available today to help you understand the way investments work.
4. Set up rules for investing
If I can give you just one piece of advice that will put the odds in your favor, that is to set up rules and follow them. Every successful investor has rules that they live by.
Here are some examples:
I will only invest in mutual funds.
I will only invest in stocks that produce at least a 3% dividend yield.
I will only invest in stocks that have increased their dividend every year for the last 10 years.
I will only invest 5% of my investing capital in one investment.
5. Invest with an exit strategy in mind
“You got to know when to hold ’em, know when to fold ’em” as Kenny Roger sings in the song The Gambler. You want to have additional rules set up for exiting the investment. You can set up a rule to sell a portion of the investment when the investment increases by 10%, 25%, or 50%, then let the rest of the investment ride on the house’s money, as investment guru Jim Cramer would say. He states: “Once you pare back your winners so that you’re playing with the house’s money, you can afford to take more risks with what’s left. That’s the holy grail of investing because you are in a can’t-lose position.”
On the other side of the coin, Warren Buffett puts more of a buy-and-hold-the-position-forever strategy in place.
William O’Neil, who invented the CAMSLIM method of investing, advises to sell the stock if it happens to go against you. If the stock falls 7% below your initial purchase price, then sell.
The financial markets are going to go up and down, that is a given. You can eliminate the confusion and fear and spend less time by putting winning strategies in place like the pros do. Set up your rules and empower yourself by investing on your terms. Then you will be on the receiving end of investment success.
Tim Mann is a highly sought-after financial coach who meets with local clients in his sunny office in Los Angeles, CA as well as clients from around the world via phone and video. He wrote the best-selling book Money on Your Terms, and conducts his biweekly radio show, The Money on Your Terms Show, to educate people on all aspects of money. Tim spent the majority of his career in the world of finance working for companies such as Morgan Stanley, Investor’s Business Daily, and Silver Star Automotive Group. He holds a bachelor’s degree in Business Administration and Real Estate. He is passionate about having people live with money on their own terms instead of everyone else’s terms.
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