Avoiding These Mistakes Will Make You A Better Trader & Investor
Most people have unrealistic expectations regarding their portfolios. Everyone wants a no-maintenance, high return, no risk, low fee portfolio. It’s human nature to want something without having to do anything for it.
So what is the difference between a trader and an investor?
Which one should you be?
Is one better than the other?
Keeping reading and you’ll find out.
Take a look at the newest trend in the dog world. Everyone loves the Golden Retriever and the lovable Labrador retriever but no one enjoys their shedding. So breeders created the Labra-Doodle, the high energy, smart, lovable, child friendly, ultimate wingman, fun loving and non-shedding companion.
But there is one problem with the hybrid, non-shedding half Poodle half Lab, they love being in the water/mud (Lab traits) and everything sticks to their coat. You have minimal shedding but you end up with mud and sand all over the house.
So the lesson is this, you can’t have everything, there are pros and cons with every situation. Trying to solve one problem (shedding) always opens up the door to another problem (a coat where everything sticks to it).
It is similar to your portfolio, when you try to gain certain advantages in one area you lose them in another area. There is no holy grail, no low risk high reward portfolio. If you want higher returns then you must take on more risk.
The average investor is usually a long term holder of stocks and typically utilizes fundamental analysis (looks at the balance sheet and income statement).
The average person likes the low maintenance, (no effort) buy and hold philosophy of the investor.
You simply buy a bunch of stocks or funds and hold on for dear life hoping they will go up.
If they go down then you buy more of it and call it dollar cost averaging.
If your stock keeps going down then you tell yourself that this stock is a long term investment and that stocks go up in the long term.
Nortel, BlackBerry, Lehman Brothers, Enron. Do these stocks sound familiar?
Did you talk yourself into holding onto those stocks as they went from market darlings to complete garbage?
Welcome to the world of investing and you wonder why you’re having trouble making consistent money in your portfolio.
The financial community, TV and the internet tell you that fundamental analysis is the way to go.
Did you know that 2/3s, 66% of active portfolio managers under perform the market index
In simple words, you have a 66% probability of beating the average portfolio manager by simply buying a market index like the DOW or the S&P500.
You just learned that that relying on conventional fundamental analysis will make you underperform the market average by approximately 66%.
Something is clearly wrong with the conventional usage of fundamental analysis.
If a portfolio manager can’t beat the market by using fundamental analysis then what makes you think you can by using the same methodology.
The average trader is usually a short term holder of stocks/funds and typically uses technical analysis (looks at charts).
The average person likes the short term gains of the trader. The instant gratification and high rewards of the trader appeal to the lazy and greedy in all of us. It’s the reason why we buy lotto tickets. We love the thrill of making a ton of money really fast. We want everything now.
Did you know that 90% of all Traders lose money?
90%, that’s A+ territory from your school days. It pretty much confirms that you will lose money if you try to become a trader.
Most people think trading is easy; in fact it is one of the hardest ways to make a living.
If the 66% of the portfolio managers can’t outperform the market averages and over 90% of the traders lose money, then what are you to do with your portfolio?
Should you be a long term buy and hold investor?
Yes but only when the current market conditions tell us to be a long term holder of stocks or funds.
How do we know when our stocks or funds are strong?
It will show us profits when the stock is strong.
When the stock/fund is losing us money then we find a stronger stock or fund and replace it in our portfolio. We never want to hold onto anything that is weak and is losing us more money than we anticipated.
Remember than losing is part of the game, we just don’t want to hang onto losers just for the sake of avoiding paper losses. Holding on in the name of hope is one of the most dangerous strategies out there.
Should you be a short term trader?
Originally published on BehindWallStreet.com
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