In this first of two part series, I will be exploring the question I get most from readers.
What is stopping me from investment and trading success?
There are no shortcuts to successful investing. Many traders base their investment decisions on their emotions (what feels right), rumors, or tips on the next hot trend. Using these factors to make investment decisions usually ends up losing money. These methods of investing are actually barriers to successful investing and you need to remove these barriers if you want to establish an effective trading practice. Removing barriers is something all investors need to do throughout their investing careers because as soon as you remove one set of barriers, others will appear. This tutorial discusses how to reveal and remove your barriers to successful investing.
Let’s now first begin with identifying the barriers.
Barriers are anything that prevents you from achieving success. In investing, most of the barriers are actually your own internal characteristics. Any investor could probably make a list of all the barriers they have. This is good because knowing what your barriers are is the first step to removing them. Many investors admit to repeatedly making the same mistakes over and over. This is mainly because they have not clearly identified what continually prevents them achieving investing success.
The barriers that investors contend with are different for everyone. Each investor has his or her own set of hurdles. The following sections discuss some of the most common barriers that investors face.
Emotion is a common concept in investing that gets a lot of attention. This is primarily because emotion is a human characteristic and often has a strong influence on an investor's trading activities. Fear and greed are the most prevalent emotions in the investing world. These emotions usually cloud a person's judgment and ability to make rational decisions. This results in losing money due to irrational decisions.
A common investment strategy is to buy low and sell high. This practice is in the investor's best interest for success. However, the emotional barrier steps in and causes an investor to second guess this method. Investors don't like selling off winners. They also don't like buying out-of-favor stocks either. When it comes to selling winners, greed takes over and compels investors to hold on to winning stocks longer than they should — even when they start to decline. Then they continue to hold the stocks convincing themselves that they will sell when the price returns to the original purchase price.
In contrast, many investors will hold on to losing investments too long hoping that their shares will recover at least to the breakeven point. While they wait for this to occur, their capital is tied up in a losing investment and they are earning nothing on the investment. Holding on to an investment too long is what most investors cite as their biggest mistake and impediment to their success.
Lack of knowledge
Another common barrier that plagues investors is lack of knowledge. It's common for investors to think that just buying and selling the right stocks is the key to making money every time. Some also overestimate their ability to beat the market so they take unnecessary risks. Successful investing requires an understanding of how the markets work, what drives stock prices, and the characteristics of successful stocks.
This strong performance of stocks (even when it's not sustainable) has a strong appeal to investors. Many investors pursue the latest trends without fully understanding why it's hot or what risks are involved.
A common investing mistake among traders is to overweight their portfolios placing too much money in a single investment. The lack of sufficient diversification is another common mistake. For example, employees might purchase a lot of stock in their company because of the convenience of having it as part of their compensation package.
Most investors continue to hold onto a stock that has substantially appreciated rather than sell that stock to capture some of the profit. This move frees up capital for other promising investments. As the price of stock goes up, an investor's portfolio becomes unbalanced favoring the appreciated stock. It is important for investors to understand that rebalancing their portfolios involves selling some of the top performing investments and buying more quality stocks that haven't performed so well. The market tends to equalize portfolios, but not always to the investor's advantage.
Ignoring the big picture
Many investors are convinced that they invest with a long-term perspective. Nevertheless, they continue to make decisions that apply more to short-term ideas. Valid long-term investments include buying a home, saving for college, and planning for retirement. Unfortunately, many investors don't make financial decisions that reinforce these goals.
Unless investors have a set plan in place for their long-term investment strategies, they often continue to make their decisions based on the ebb and flow of the current market. Making decisions based on these market conditions creates a barrier to achieving long-term financial goals.
A common practice among investors is to pour cash into stocks and mutual funds when they discover that the market has risen. In contrast, when the market drops, investors often panic and sell off their investments at low prices.
Next week, we will get into the strategies of how to remove these barriers.