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This year has been unkind to many investors who were used reaping fortunes out
of the stockmarket. It may be easier to be disciplined when the market is rising,
but it definitely is hard sticking to the few trading rules that you vowed to follow
earlier during market dips. Things are always easier said than done. Talk to anyone
who had their fingers burnt and they will agree with you.
The key to successful investing is to follow a disciplined approach. No doubt the
word "discipline" always springs to minds of investment professionals.
Practically everyone knows that one has to be disciplined when it comes to investing
or saving your money. Yet, time and again, investors who have lost their money in
direct investments wish they had been more disciplined in their trading.
For example, professional traders always recommend that investors should not be afraid
to cut losses to minimize losses when things go sour. But for some investors, that
advise may not be so easy to accept in reality.
One dread about investing is regret. Often people come to you with all kinds of hot
tips. How many times have you said "I regret not buying a stock recommended
by my remisier two days ago and now that the price has risen more than 40%"
or "I hate myself not taking profit earlier now that the price has just dropped
back to its original level".
Such is the life of an investor - trying to cope with the ever-changing investment
world. Investors normally experience lots of ups and downs throughout life regretting
one investment or another.
Picture this! You received a very good tip and bought stock XYZ at RM7.00 targeting
a 50 sen profit at RM7.50. Your cut loss point is at RM6.00. The market dipped and
stock XYZ indeed dropped to RM6.00. You thought of cutting loss but your dealer friend
told you that it is just a temporary dip.
Your mind gets distorted and you become confused. In addition, you realize that cutting
loss at RM6.00 may be too painful as you have bought quite a few lots. In the end,
you do not cut loss. The price falls to as low as RM5.00. You are upset and fearing
more loss, you take no further chances - cut at RM5.00. Your net loss ended at RM2.00.
To add more salt to your wound, your friend was right and the price shot back up
to RM7.00 and finished the day high at RM7.50 (which was your original target). You
end up drunk and dazed, wishing you had not followed your original plan of cutting
loss.
Cut your losses short? Sounds great but how do you actually do it? Do you get out
of a position as soon as it show a loss or do you give in certain allowance and if
yes, by how much? At some point, almost all trading positions show a loss, how do
you identify whether it is a real loss.
In the above example, the stock eventually went back to profitable territory despite
a short-term market setback. If the opposite occurred, you decided not to do anything
given the view that it is just a temporary dip only to learn later that the stock
plunged to the dayís low at RM4.50! What should I have done? Very simply, pearls
of trading wisdom are more easily recited than implemented.
Take the classic advice: "Do not trade on hopes or fears" - do not let
your emotions overcome our investment decision. But, investors are human, they are
affected by psychological factors such as greed, fears, hopes no matter how professional
and experienced they are.
Denial, anger, bargaining, depression, etc is part of the mental process that an
investor normally goes through when losing money in the market - when the losing
position starts to get personal.
"Crowd" is the common factor that contributes to emotional decision-making.
As you become a member of the psychological crowd, you experience varying psychological
influences. Your behavior or patterns of trading could change radically not reflecting
your inner characteristics.
There are some basic rules that investors should follow when investing in any market
and in trying to protect their hard-earned money. Resist buying a stock that has
already gone up a lot or where a trend has already developed. Convince yourself to
forget "hot" stocks. Remember, there are plenty of opportunities out there.
Be prepared for the ups and downs of markets particularly if you are investing in
stocks. When investing in the stockmarket, remember that short-term volatility is
common and that stocks always perform over the long-term. History will tell - in
the 10 years since the October '87 crash, Dow Jones has risen by more than 300%.
If you worry too much about the ups and downs of the markets, go the "dollar-cost
averaging" route - invest the same amount of money regularly. That way, you
do not have to worry too much about market sentiment and doing detailed market research.
Unfortunately, no method will guarantee that you will not lose money.
Diversify, diversify, and diversify. Do not concentrate on a single stock but rather
on an entire portfolio. Havenít you heard "do not put all eggs in one basket".
No investment is 100% safe including the money that you put in banks. That is why
you need to diversify to reduce risk. For those who are very active in the market
or intend to be active and hope to be successful in their investments, some tips
which may be useful in minimizing losses:-
- Be self-disciplined, study the market. Update yourself daily with latest developments
- Do not think short-term only. Short-term wealth is unlikely to secure your financial
security. Have separate plans for medium and long-term investments.
- Be persistent. Do not quit just because you have lost a few rounds earlier. Learn
from the losses and identify what went wrong. It is because you were swayed by friends
or rumors? If so, next time stay away from them when making decisions.
- Make sure you have enough capital base when trading. You will be nervous and
most likely to make silly mistakes if you have only RM1 trying to bet on a RM3 stock.
- Self-control - try to overcome the two evils - greed and fear. Just because it
does not come easy it does not mean that these problems cannot be overcomed. Identifying
the cause and learn from past experiences.
- Try not to invest in something that you do not understand. An unfounded "hot
tip" from your friend is unlikely to grow your wealth over the long-term.
- Know your investment limit - how much money can you afford to lose?
Lastly, you may opt for an alternative way to invest - professionally managed
funds such as unit trusts either local or international has its advantages particularly
for small investors. The trick is to know which fund manager and what asset class(s)
you want to have exposure to in order to protect yourself. The degree of exposure
depends on your attitude towards risk and return. If you are new to the world of
investments, talk to independent financial advisors.
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