2 Trading and Investing Mistakes Costing You Millions.
Here's how short-term traders and long-term investors can increase profits immediately.
You Will Never Go Broke Taking Profits
At the end of last week, I had conversations with two different investors. They have different investing strategies but a similar problem—losing money.
There’s a simple solution for each, and here they are:
Investor 1: The short-term strategy
At some point in your investing journey, you’ve probably made a short-term investment (or trade) and intended to sell it after making a small profit. But once you saw the profit growing in your portfolio, you started flirting with greed and held on longer than you should have.
Before you knew it, you had given all the profits back to the market before finally selling at a loss.
Trust me, I feel your pain, and so does the short-term investor I spoke to last weekend. He said that’s one of his biggest challenges. He knows he’s trading emotionally, but he finds it even harder to break the cycle.
There’s a term for what he’s experiencing; “trading psychology.”
It’s the study of how emotions influence your beliefs, actions, and decisions as a trader. Fear, greed, nervousness, hope, and regret can all impact your decisions.
Identifying his emotions is simple:
He’s excited when the trade goes his way and hopeful it’ll keep going up. Ultimately, greed causes him to hold onto the stock long after he should have sold it.
When the stock falls short-term, he hopes it will return in his favor, so he doesn’t sell. As the price drops further, he feels nervous because he’s now in a losing position. Fearing the loss of even more money, he finally sells at a loss. Of course, after he has sold, the price increases again, and then he regrets every decision he made.
That behavior is expected at the beginning of a trader’s journey. So, never be too hard on yourself. Shoot, I did the same thing at the beginning of my journey.
Most people will tell you to keep a trading journal. Writing down your emotions and reactions daily can help you master them. There’s merit in that; I’ve done it. The only problem is that it takes time! While learning it, you’ll likely keep losing money until you’ve mastered it.
So, to speed up the process and harvest more money today, make it a personal rule to always take profits when you have them. Don’t wait! Take it no matter how much profit it is (even $50). It will train you to be consistently profitable.
In time, you’ll be a more experienced trader using less emotion and more logic. Then, you can lean on technical analysis to sell for the most profit possible.
It’s how I earned $1,200 in less than 2 hours on Friday.
Investor 2: The long-term strategy
You can almost guarantee you’ll be profitable if you buy stocks of a great business and hold them for years.
That was the case with the long-term investor I spoke to. He’d been holding his stocks for months (some for years) and had made a lot of profit.
When the market declined, his total profits reduced, but he never lost any of his principal—a benefit of investing over a long period.
However, he’s frustrated that he has to wait for the market to increase and return the profits lost during the decline. So, in the future, he wants to harvest profits at market highs and repurchase them after prices drop.
His thinking isn’t uncommon; I have multiple brokerage accounts, and sometimes, I search for the same magic key in my retirement portfolio.
But the truth is, in this scenario, the investor wants the best of both worlds: the comfort of long-term investing and the flexibility/harvesting benefits of a short-term strategy.
Unfortunately, we just can’t have our cake and eat it, too.
Selling your long-term investments for short-term gain is often a mistake, and here are three reasons why:
No one knows what the “market high” actually is. Imagine selling 500 shares of your best-performing stock on the speculation that the market will decline. If the share price doesn’t fall and increases by $5 after you sell, you just forfeit $2,500. Do not try to time the market!
When you purchase low-priced shares regularly, you benefit from dollar-cost-averaging. But sell your shares, and all that goes away.
You might lose your ability to claim long-term capital gains during tax season. Instead, you might be taxed much more because you sold your investment earlier than your strategy called for.
Here’s a simple solution for the long-term investor:
Simply put—just buy more shares when the market declines.
Whenever the market returns to its previous levels, you’ll have more shares than you once did, causing your total profit to increase substantially.
I (along with Warren Buffett and other notable investors) practice this strategy in a long-term account.
Just consider it a discount. Who doesn’t love one of those?
Let’s Learn: Dollar Cost Averaging
What if you could buy stocks regularly and never stress whether the market was up or down?
There’s a term for that: Dollar Cost Averaging (DCA).
Essentially, instead of purchasing shares at a single price point, with dollar cost averaging, you buy in smaller amounts at regular intervals, regardless of price.
It’s great for beginner investors looking to get comfortable investing, reduces the risk of price volatility, and eliminates the effort of timing the market to buy at the best prices.
Consequently, investors usually lower their average cost per share.
Here’s an example:
The Investopedia chart below shows an employee named Joe, who dollar-cost-averaged over ten pay periods. Joe invested $50 each paycheck into the S&P 500 Index Fund regardless of the share price listed. Here’s what happened:
Even though the price of the S&P 500 Index Fund fluctuated between $10.00 and $11.25 each pay period, dollar-cost-averaging caused Joe’s total cost per share to be $10.48.
By committing to this approach, investors avoid the risk of making decisions based on greed or fear, like rushing to buy more when prices are rising (greed) or panic-selling when prices decline (fear).
Tools and Resources
I’ve invested in short-term and long-term accounts since 2013. On this journey, I’ve learned a few things about buying and selling at specific levels to maximize my profits.
It’s how I made a total net profit of $1,219.99 last Friday.
Would you like to learn how to do the same? CLICK HERE