1. Keep abreast of geopolitical and economic events. Be a constant observer of what is going on worldwide. You should be aware of the major weekly news events from around the globe.
This lifelong homework assignment will do four things for you: First, it will give you a big picture of what is going on in the world. Second, it will help you spot possible significant events before they hit the market. Third, it will give you perspective in life. It will remind you that the world does not revolve around you – which his healthy. Fourth, it will make you a much better conversationalist at cocktail parties.
2. Watch for major uptrends and downtrends in the market. October 2007 was an example of a major downtrend. Those who spotted it avoided major losses. March 2009 was the beginning of an historic uptrend in the markets. Those who ignored that market shift missed out on historic gains.
Two recommended services for spotting major shifts in market trends are Comtrex (mysmartrend.com) and VectorVest.com. Both services utilize sophisticated technical analysis and have a solid track record of spotting major uptrend and downtrend shifts in the market.
Since 75 percent of stocks move in the general direction of the market, in most cases it is recommended to buy on uptrends when the market is projected to rise and sell on major downtrends when the market is projected to decline.
3. Become aware of major trends and demographic shifts in our society. Read publications outside your field. Spend some time with teenagers. Hang out with those who are on the cutting edge in their fields.
4. Watch out for the X factor. The X factor is the unforeseen event that blindsides all of us and has a major impact on our portfolios. September 11, 2001, is a prominent example of this. This unforeseen event did more to rock the financial markets than almost any other single event in US history. Always ask yourself, “What would I do if an unforeseen disaster rocked the markets?” Could I handle it? Remember, the unexpected happens quite often. While you cannot predict what the event will be, you should always ask yourself, “What would I do if the market crashed tomorrow?” If you think that is ridiculous, remember – no investor was thinking a thought like that on September 10th, 2001.
5. Become more of a trader – reconsider long-term buy and hold strategies. This does not mean becoming a day trader – something I absolutely do not recommend.
6. Avoid the “doubling down on losers” trap. Quite often when investors have losses on a stock, they’ll double down in an effort to get back to break even. But this often just leads to even greater losses. Doubling down on a poor performing stock is a quick way to lose a lot of money. It’s a casino-based mentality.
8. Don’t overdiversify – Warren Buffet does not invest in mutual funds. He prefers to invest in a handful of companies that he believes provide the best risk/reward ratios. Diversification is important – but overdiversification lowers returns.
9. Investment decisions should be made by rational thinking, rather than emotional thinking. Emotions get in the way of logic. As much as possible, try to take emotions out of the equation. Emotional trading does more to ruin portfolios than just about anything else. Brain/neurological research has shown that we humans are consistently prone to thinking traps that can lead to bad investment decisions. And this includes high IQ investors.
We must control our emotions, especially the two biggies – fear and greed. Make more rational trading decisions and fewer emotional trading decisions. Become aware of some of these thinking traps that ensnare investors.
10. Take full responsibility for your portfolio. Even if your money is managed by someone other than yourself, take full responsibility for the performance of your results. Don’t be afraid to fire your broker or money manager. If the Bernie Madoff scandal taught us anything, it is, take full control of your investment decisions. Do not blindly allow anyone else to do it for you.
Disclosure: No stocks mentioned