Some Thoughts On Investment Basics
Many investors do almost everything wrong. They invest for the wrong reasons, they make the wrong investments at the wrong times, and they draw the wrong conclusions about the markets and the investments they are making. And as much as anything else, they fail to trade according to a disciplined trading plan - one that matches their goals and investment personalities - and as a consequence, they lose money.
Of all the elements that go into a successful investment program, two can probably be identified as the most important: matching your investment program to your own personality and implementing a clear investing plan. You must first assure yourself that your own emotions will not sabotage your investments, which means that you must select investments that suit you. Once that task has been accomplished, you must still follow an intelligently conceived investing plan to succeed in your efforts to improve your lifestyle - which is, after all, the final goal of investing.
Without an investing plan, you will find yourself returning whatever gains you achieve. You won't know when to take profits. If a profitable holding turns back down, you will continue to hold, convincing yourself that the setback is temporary. When the "temporary" setback carries the investment's price below your original purchase level, then you'll exit with a loss. And all such disappointments can be avoided, by simply adhering to an investing plan, which means you know why you are investing, your investments suit your goals and personality, you are investing in comfortable increments, and you know precisely at which points you are wrong or ready to take profits.
For some reason, many investors fail to approach their investments with a crucial overview - they fail to match their investments to their emotions and the demands of their lifestyles. People whose lives revolve around stability find themselves in a panic because they placed their investment capital in speculative investments; others who are unfettered by family responsibilities and financial obligations find themselves bored and inattentive of their investments because they have placed their investment capital in conservative investments. Most often, people who have not correctly matched their trading plans to their own emotions and living conditions lose their money, even when they could, and should, profit.
Usually, the error involves chasing investments that are too speculative for an individual's personality. Most people are unwilling to view themselves honestly enough to determine the true personal consequences of various investments, and therefore they select the wrong vehicles. Beginners in particular are first lured toward the fastest-returning vehicles, regardless of risk, and - worse - regardless of their needs and desires. Subsequently, they lose money quickly, when all they really wanted to do was to gain it slowly. This is tied to an equally important fact: Most investors tend to respond incorrectly to the realities of their own obligations and needs.
And while it is true that every individual case differs, the key ingredient here is honesty - being honest with yourself in matching your investing style to your emotional tolerance. You must make a very clear and honest appraisal of yourself both in terms of your personality, as well as your station in life, and then you should tailor your investments to that honest appraisal, otherwise your investments will fail to meet your true purposes and goals.
If your personality is not comfortable with the rigors of speculation and the degree of anxiety that risk can generate, then you really should pursue other investment choices. But if your lifestyle is flexible and your obligations are well under control then there should be no reason for you to avoid the risks that investing presents in your effort to acquire wealth. The big question to ask yourself is this: Can you handle the task emotionally?
This is actually both simple and difficult to do. It's simple because the questions are so obvious, and yet it's difficult because you have to be completely honest with yourself, about yourself. While you can ask yourself a long list of questions about your needs and obligations, it's much more difficult to determine your needs for the future. And once you have determined the requirements of your lifestyle, then you must figure out how you can meet those desires without placing an undo burden on yourself or your lifestyle.
Once you have an idea of the scope of your lifestyle, you can then begin to develop an investment program to match it. In short, your investment style should always match both your emotions as well as your station in life - at each and every stage of your life.
Your investment plan will always be closely tied to both your goals and the realities of your lifestyle. And if your investments do not match your dreams and your personality in equal measure, then no investment plan will work for you. But once you have assessed yourself realistically, then the task of creating an effective investment plan becomes merely a matter of economics, plus a way for you to circumvent your emotions.
The mechanics of it are fairly obvious. First you must determine the amount of risk capital that you have at your disposal. And it should go without saying that emergency funds are never to be considered as investment capital.
Regardless of the risks that you intend to assume, your investment plan should be carefully thought-out and followed with religious fervor. There will always be winners and losers in your portfolio, and your investment plan must be designed to identify those positions, and to then direct you toward new investments that will replace whichever changes have occurred in your portfolio. And the heart and soul of any investment plan is discipline.
No matter what it is that you choose to invest in, you must give yourself time. And all of your investments should be made within these parameters: 1) You have a reason for making the investment, whether it's due to someone else's recommendation or the result of your own research; 2) you have an objective toward which you think the investment should rise; 3) and most importantly, you have a point at which your investment will tell you the choice was wrong. In other words, you have an exit point.
Without a disciplined investment plan, you will likely take round trips on all of your profitable positions. All the emotional stresses to which people are subjected are things which will hurt you as an investor. Acting emotionally will never lead to profit in investment situations. Investments can only reap profits in direct relation to how objective, disciplined, calculating, and cool-headed you are as an investor.
In any event, once you have embarked upon an investment program, and once you have set in motion an investment plan that matches your goals and emotions, let it do its work for you. Let it do the job you gave it. And you may be surprised one day when the end result of that plan matches or even exceeds your hopes and aspirations!
* * * * *
Of all the elements that go into a successful investment program, two can probably be identified as the most important: matching your investment program to your own personality and implementing a clear investing plan. You must first assure yourself that your own emotions will not sabotage your investments, which means that you must select investments that suit you. Once that task has been accomplished, you must still follow an intelligently conceived investing plan to succeed in your efforts to improve your lifestyle - which is, after all, the final goal of investing.
Without an investing plan, you will find yourself returning whatever gains you achieve. You won't know when to take profits. If a profitable holding turns back down, you will continue to hold, convincing yourself that the setback is temporary. When the "temporary" setback carries the investment's price below your original purchase level, then you'll exit with a loss. And all such disappointments can be avoided, by simply adhering to an investing plan, which means you know why you are investing, your investments suit your goals and personality, you are investing in comfortable increments, and you know precisely at which points you are wrong or ready to take profits.
For some reason, many investors fail to approach their investments with a crucial overview - they fail to match their investments to their emotions and the demands of their lifestyles. People whose lives revolve around stability find themselves in a panic because they placed their investment capital in speculative investments; others who are unfettered by family responsibilities and financial obligations find themselves bored and inattentive of their investments because they have placed their investment capital in conservative investments. Most often, people who have not correctly matched their trading plans to their own emotions and living conditions lose their money, even when they could, and should, profit.
Usually, the error involves chasing investments that are too speculative for an individual's personality. Most people are unwilling to view themselves honestly enough to determine the true personal consequences of various investments, and therefore they select the wrong vehicles. Beginners in particular are first lured toward the fastest-returning vehicles, regardless of risk, and - worse - regardless of their needs and desires. Subsequently, they lose money quickly, when all they really wanted to do was to gain it slowly. This is tied to an equally important fact: Most investors tend to respond incorrectly to the realities of their own obligations and needs.
And while it is true that every individual case differs, the key ingredient here is honesty - being honest with yourself in matching your investing style to your emotional tolerance. You must make a very clear and honest appraisal of yourself both in terms of your personality, as well as your station in life, and then you should tailor your investments to that honest appraisal, otherwise your investments will fail to meet your true purposes and goals.
If your personality is not comfortable with the rigors of speculation and the degree of anxiety that risk can generate, then you really should pursue other investment choices. But if your lifestyle is flexible and your obligations are well under control then there should be no reason for you to avoid the risks that investing presents in your effort to acquire wealth. The big question to ask yourself is this: Can you handle the task emotionally?
This is actually both simple and difficult to do. It's simple because the questions are so obvious, and yet it's difficult because you have to be completely honest with yourself, about yourself. While you can ask yourself a long list of questions about your needs and obligations, it's much more difficult to determine your needs for the future. And once you have determined the requirements of your lifestyle, then you must figure out how you can meet those desires without placing an undo burden on yourself or your lifestyle.
Once you have an idea of the scope of your lifestyle, you can then begin to develop an investment program to match it. In short, your investment style should always match both your emotions as well as your station in life - at each and every stage of your life.
Your investment plan will always be closely tied to both your goals and the realities of your lifestyle. And if your investments do not match your dreams and your personality in equal measure, then no investment plan will work for you. But once you have assessed yourself realistically, then the task of creating an effective investment plan becomes merely a matter of economics, plus a way for you to circumvent your emotions.
The mechanics of it are fairly obvious. First you must determine the amount of risk capital that you have at your disposal. And it should go without saying that emergency funds are never to be considered as investment capital.
Regardless of the risks that you intend to assume, your investment plan should be carefully thought-out and followed with religious fervor. There will always be winners and losers in your portfolio, and your investment plan must be designed to identify those positions, and to then direct you toward new investments that will replace whichever changes have occurred in your portfolio. And the heart and soul of any investment plan is discipline.
No matter what it is that you choose to invest in, you must give yourself time. And all of your investments should be made within these parameters: 1) You have a reason for making the investment, whether it's due to someone else's recommendation or the result of your own research; 2) you have an objective toward which you think the investment should rise; 3) and most importantly, you have a point at which your investment will tell you the choice was wrong. In other words, you have an exit point.
Without a disciplined investment plan, you will likely take round trips on all of your profitable positions. All the emotional stresses to which people are subjected are things which will hurt you as an investor. Acting emotionally will never lead to profit in investment situations. Investments can only reap profits in direct relation to how objective, disciplined, calculating, and cool-headed you are as an investor.
In any event, once you have embarked upon an investment program, and once you have set in motion an investment plan that matches your goals and emotions, let it do its work for you. Let it do the job you gave it. And you may be surprised one day when the end result of that plan matches or even exceeds your hopes and aspirations!
* * * * *
posted by Bob Moser at
7:05 PM
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