Investing in the markets is not something that we are particular knowlegable about. That is why we are pleased to present today’s guest post from our friend Tony at A Young Investor. If you are interested in submitting a guest post, please see our guest posting guidelines.
We’ve all been through the “if only I had know this, I would have done better” mentality. Unfortunately, life has no rewind button. Through this post, I hope to highlight a few things that I only wish I had known when I started investing so that you can avoid similar pitfalls.
Stick To What You Know
My father, and infrequent gambler, would always come back from the casino with a couple of hundred dollars extra (but because he rarely gambles, he’s not on their black-list). Every time he’s in Vegas, the people at his table are always asking “how do you do it?”. The answer is simple; my father only plays 1 game: Blackjack. By repeating the same game over and over, he picked up on the tricks of the game. The big losers are those who jump from different game to different game. The lesson?
Stick to the products that you know. I have a list of 6 financial assets I’m interested in – outside of that 6, I don’t touch, even if I foresee a potentially profitable investment. By playing the same “game” over and over again, you’ll learn many of the unspoken tricks of the game. For example, silver’s large fluctuations and long periods of non-movement makes it an excellent candidate for use of contrarian indicators. Since I only use ETF’s, I’ve become very familiar with the product (especially 3X leveraged ones), and as such have discovered that ETFs over time can erode in value. Only by sticking to what you know can you truly understand and profit from the investment.
Know Your Pain Threshold
This reminds me of a story from Reminisces of a Stock Operator
A successful investor in 1929 says to his wife “take this $300,000 and sock it away forever. It will be our emergency fund, in case I lose all the rest of my money in this bear market. If I come to ask you for that money so I can put it into the stock market, you MUST say no.” 10 months later, the man loses everything, and in his hysterical state, begs his wife for the $300,000 so he can invest in the stock market again. After a ton of nagging, his wife gives in: the man puts all $300,000 into the market, loses it all, and goes broke.
The morale of this story is that you must know your pain threshold – what is the maximum amount of money that you’re willing to lose? Once your losses hit that threshold, close your entire losing position to stop the blood loss. Many investors make the mistake of letting their losses grow larger and larger to the point of no return – cut your losses so you can sleep better at night and start afresh.
Speaking of Cutting Losses…
You need a safety net. No, I’m not talking about a social safety net – what I’m saying is that you need SOMETHING that will minimize your losses and risk in the financial markets. This can be done by:
- Diversifying. This is probably the most commonly given advice on financial blogs “don’t put all your eggs in one basket, spread your risks among multiple bets, etc”. Instead of rehashing what has already been said, I’d like to give a piece of advice: the purpose of diversification is to find UNCORRELATED assets. Too many investors diversify, only to realize that all the assets fall and rise together, which defeats the purpose of diversification.
- This is the approach I prefer. I like to keep a percentage of my portfolio in cash, always. That way, should my account register a whooping loss, I still have the comfort that 20% of my portfolio remains perfectly intact. While this might reduce returns, but at least I sleep well at night knowing my risk is reduced.
Tony invests in multiple financial assets, mainly in the stock, commodity, and currency markets. He enjoys sharing what he knows at A Young Investor.