The stock market and real estate markets are at record highs in 2021 after a 10+ year bull run. We all want the party to continue, but we don’t know when everything with go to hell in a hand basket. To become a better investor, you have to be able to weather both good times and bad.
How To Become A Better Investor
Here are some thoughts on dealing with fear and greed to minimize sub-optimal investment decisions.
- When things are going to hell, remind yourself that rebounds are inevitable and it’s better to stay the course if the business models of your investments are not broken.
- Have conviction in your buy and sell ideas, but don’t become so delusional as to think you will consistently beat the market.
- When you’re sitting on big gains remind yourself that your gains mean nothing until you lock in profits.
- Too many people tend to believe they are a genius in a bull market. Remind yourself that you are nobody special.
- If you left a lot of money on the table, tell yourself a win is better than a loss.
- Consider spending some of your money on something tangible that lasts for longer than the days the euphoria of a gain lasts.
- Consistently reassess your risk tolerance by testing your pain points. It’s very hard to know what your risk tolerance is without going over the edge. Having over a 40% position valued at $170,000 in one stock is too much for even my punt portfolio. By constantly monitoring my own emotions I’ve concluded that $50,000-$80,000 equivalent to 10-15% of a portfolio is ideal where I can go on vacation on not worry. Risk tolerance is a combination of the absolute dollar amount + percentage of portfolio.
More Suggestions On How To Become A Better Investor
- Rebalance your portfolio at least twice a year and do a deep dive at least once a quarter.
- If you lose your shirt, go to the bathroom and give a good cry. Then get yourself together and list out all the things you did wrong so you have a better chance of making money in the future.
- Use limit orders as much as possible when buying and selling positions.
- Consider using three tranches or more when you invest to build or get rid of a full position.
- Implement stop loss orders of 15-20% coupled with your legging in strategy. It’s important not to get married to a stock. We’ve seen stocks lose investors tremendous amounts of money in the past.
- The only way to become a better trader is to list out all your mistakes as I’ve done here. Learn from them, feel the pain, and try not to do them again.
- No bet, no win. You’ve got to take calculated risks in order to make money in the stock markets. If you’re uncomfortable with taking so much risk, consider hiring a financial adviser to offload your stress. Here’s an article I wrote for experienced investors with sizable portfolios on how to utilize a financial adviser as well.
Always Be Mindful Of Your Investments
I cannot emphasize enough how important the relationship is between risk and reward. We cannot have delusions of making lots of money if we aren’t willing to invest in riskier assets or businesses. Just think of early stage Venture Capital money.
Money is often invested based off a management’s reputation or an idea alone. Profits are often a long ways away, but when there is a liquidity event, such investments can pay enormous windfalls. Most investments will fail, but the key is to identify investment opportunities and have the guts and connections to put your money where your mouth is.
Greed and fear are inescapable for those who take an active approach to investing. Most of us will not outperform the broader markets, which is why most of our capital is invested in index funds, mutual funds, stable large cap dividend stocks and so forth. Although some us will tremendously outperform. When we do, we can attribute our wins due to luck instead of research and guts to keep detractors at bay.
Here are some more helpful posts to help you become a better investor and grow your wealth
- How To Know When To Take Profits On Your Investments?
- The Best Time To Retire May Be Under A Democratic President Like Biden
- Why High Portfolio Turnover May Be More Costly Than High Mutual Fund Fees
- How Long Will The Average Person Take To Earn $1 Million Around The World?
- Every Investment Decision You Make Is Market Timing
- The Biggest Benefits Of A Stock Market Meltdown
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