Recently I had a client call in to sell his position in a fertilizer stock in which he made a 20% profit. His reason for selling was that the stock showed signs of weakness and he thought the Federal Reserve speech might spook the market into a downtrend. Fair enough. A few hours later I had a different client call to buy the same stock, saying he saw signs of weakness and thought it might be a good time to buy the stock. Plus, he thought the Fed speech might be positive and give the markets a boost. Two smart guys with totally different opinions. The experience reinforced my belief that most investors don’t know a thing about the markets. Trying to guess the short-term direction of a stock is usually a losing proposition. I’ve been thinking for the last few hours about what strategy a moderately conservative investor could use to seek out some growth in their portfolio without taking on too much risk. The below strategies should help you mitigate risk and hopefully teach you a thing or two about the movement of stocks.
The first thing we can do is stop trying to guess where the markets are going. Instead, focus on what you can buy when the market goes down. The way to do this is by keeping a decent percentage of your money in cash. This way, when the market drops, you can buy more of your stocks or funds. Buying on the dips will usually be more profitable than buying on a rally. So, keep some money in cash and look at those ‘down days’ as opportunities.
Next, look for companies which don’t correlate directly with the overall market. The idea is to find companies which may go up even on days when the overall markets are down. Usually, this happens with ‘value-oriented’ stocks which appear to have a more limited downside and greater appreciation potential. There are several fundamental metrics which investors can look at to determine how the market is valuing each stock.
Finally, learn how to take a profit. Psychology plays a strange role when investing in that it begs us to do the wrong thing. Most people who make money with stocks in a short period of time want to hold on for more. Similarly, most people who are losing money on a stock refuse to sell it until it bounces back to a certain level. We need to rid ourselves of emotion and establish prices to enter and prices to exit. If you do set up a quantitative strategy for your investments, stick by it. It will cause you to take more profits. Recently, with market volatility at an all time high, this strategy has worked particularly well.
There you have it. Keep some of your portfolio in cash, buy value-oriented investments, and learn when to take your profits. These common sense ideas aren’t practiced enough by investors and really work. Good luck!
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