The odds are stacked against you as an investor.
You have a job. You have a life. You just don’t have time to investigate opportunities like a professional analyst who covers 10 stocks, visits the companies, talks to management regularly, and pores over word of quarterly earnings conference call.
Professional investors have so many advantages over you that they should be able to make fortunes in stocks.
If you look at the average mutual fund returns, however, you know they can’t win even with all the advantages. So, if they can’t even beat the markets, how can you succeed as investor?
Well you can. It starts with the basics. Over the years I’ve refined five guiding principles that will make you a better investor and survive even the toughest markets.
Here they are.
Discover What Type of Investor You Are
The market makes fools of some of the brightest minds out there. And it’s important to realize early on that you won’t have all the answers because you won’t right away.
It takes time to discover your own investment weaknesses and strengths.
In order to really determine them, you must focus on why you’re investing and find investments that match that. If your goals are long-term, your investments should match. After that, you’ve got to develop a strategy for finding and making investments that works for you.
Keep an Open Mind
Being open to investment strategies is generally a good thing, even if you think you’ve got something that works well already. If you chase and deploy all of them you’ll end up complicating the whole process and your performance will suffer.
The key is to focus and become intimately familiar with the approaches that align with your investment style as we discussed above. Ultimately you must develop entry and exit systems to take as much emotion out of the equation as possible.
Know your risk tolerance and make sure you have protective points in place to preserve capital.
Assume You Won’t Be Perfect
It’s how you deal with loss that often determines how successful you are as an investor.
Strive for continual improvement but don’t get hung up on a perfect track record.
Keeping losses small and squeezing as much out of the winners as you possibly can. That way even if you’re “right” on less than half of your investments, you will still make money over time.
Know Where the Best Profit Opportunities Are
I tend to search for investment ideas in small-cap stocks.
That’s because most are insulated from geopolitical issues, such as trade war fears. Remember, small caps have much less exposure to international headaches than companies in the S&P 500.
Even better, small-cap stocks have a history of outperforming large-caps, returning an average gain of 12% a year over the last 90 years, as compared to a 10% annualized gain on the S&P 500, as reported by Market Watch.
And, according to Smart Asset:
“Between 1979 and 2015, small-cap stocks in the Russell 2000 index outperformed large-cap stocks in the S&P 500 20 times within 37 years. In terms of the average annual return on investment, small- and large-cap companies’ stocks were virtually neck and neck, with the S&P 500 paying investors back 11.7% annually versus the 10.3% annual returns generated by the Russell 2000 index. In the long run, investing in smaller cap stocks may be just as profitable (if not more profitable) than investing in larger ones.”
Have a Plan
Have a complete 360-degree view of what you’re buying before you buy it. Fundamentally, take a look at what’s under the hood of the company with regards to earnings ratios. Technically, understand what’s happening in the short- and long-term with support and resistance.
Know your exit strategy, and your money management strategy, including stop losses and trailing stop losses. Never risk money you cannot afford to lose. Keep your expectations in check, be realistic. And above all else, never risk more than you can afford to lose.