We’re in the dog days of summer. There isn’t a lot happening on Wall Street. Yes, even the masters of the universe take a vacation now and then.
In weeks like these, it pays to take a step back and consider “big picture” ideas that will improve our financial future.
This isn’t about crushing it on a single trade but rather about making each of our investment moves incrementally better.
Now, there are lessons to be learned here and lessons not to be learned; buy and hold do’s and don’ts if you will.
We’ll start with the do’s. When we invest, we should always start with a plan. When your trading rules are defined — and you’ve limited your potential losses — you can afford to be patient.
If you know going into the trade that you plan to cut your losses after, say, a 10% decline, you can give the position free rein. If it falls 8%, no worries.
That’s within your defined tolerance, so there is no reason to “do” anything. You can give the position room to work itself out, knowing that any losses are capped. You have the luxury of being patient.
I chose 10% as an arbitrary number, so don’t get fixated on that exact amount.
The key is to establish your selling conditions before you commit to the trade. Unless those conditions are met, trust your plan and let it work.
In most cases, it pays to be patient with your trades and give them time to work out. But this doesn’t mean you should buy and hold every position forever. Following your system means you are willing to exit when your conditions are met.
You never lose 100% on a stock trade in a day. It’s almost always death by a thousand cuts. You watch the stock slide lower each day, hoping and praying it recovers. If you have a plan and stick to it, you can save yourself that misery.
It pays to remember one thing: Not every investment is a winner.
Here’s a fun fact for you. Warren Buffett made 75% of his trading profits this year with just three stocks. The entire rest of his portfolio only accounted for 25%.
This is the Oracle of Omaha we’re talking about. He is one of the greatest — if not the greatest — investors of all time. And even in Buffett’s case, plenty of his portfolio positions have been duds.The key is to run your system. If it’s a good system, your winners will outpace your losers over time. You just need to let the system work.
This article first appeared on July 15 on the Money & Markets blog.
Photo Credit: Jacinta Iluch Valero via Flickr Creative Commons
This piece is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.