Why You Must Become a Traderby Jerry Jose CEO Do you consider yourself more of an investor... or a trader? The distinction is important. It could mean the difference between an account that stagnates or dwindles away over the coming years... and an account that grows consistently, no matter which direction the market or the economy is heading.
For decades, we have been led to believe that "investing" is safe... while "trading" is risky. But the way most people "invest" is about the riskiest way you could possibly manage your money. The prevailing advice went something like this:
"Diversify your investments. Buy quality companies and hold them until you retire. Whether it is stocks or real estate, the values always go up over time." That is... until they don't.
The past few years have shown us how unwise (and unsafe) that advice really was. Due largely to the liquidity crisis over the past year, the correlation between formerly "diversified" assets has trended toward one. Diversification helps very little when EVERYTHING is falling.
And while real estate and the stock market generally DO rise over the long-term, that is hardly any consolation if your retirement is five years away. Millions of people have paid a heavy price for these misconceptions.
"Buy and hold" works great when earnings multiples are expanding across the market, like they were in the 1980s and 90s. But a religious adherence to "buy and hold" can spell disaster in a period where earnings multiples are contracting, as they are now.
Michael Covel, the author of "Trend Following: Learn to Make Millions in Up or Down Markets," points out some important pitfalls of the "investing" mindset:
"Investors put their money, or capital, into a market, such as stocks or real estate, under the assumption that the value will always increase over time. Investors typically do not have a plan for when their investment value decreases. They usually hold on to their investment, hoping that the value will reverse itself and go back up. Investors typically succeed in bull markets and lose in bear markets."
Most investors have no idea how to respond or, better yet, how to capitalize when the markets are falling. Clinging to the ingrained idea that the markets "always rise over time" they tend to "hang on" until they finally capitulate... usually near the bottom.
Even if you consider yourself a "long-term investor", I believe you should manage your investments like a "trader." That does NOT mean you need to adopt a short-term outlook, buying and selling every day or even every month.
It does mean two things:
1. You should have a clearly defined sell strategy. Before you ever enter an investment, you should have a line in the sand that tells you when to get out if you're wrong. If that line is crossed, you sell. No questions asked. On the other hand, when a stock moves in your favor, you should employ a trailing stop that gives your winner room to run... but would trigger a sell if that uptrend reverses and the winner begins to fall.
2. You should be prepared to profit when the markets rise AND when they fall. While we have recently experienced the sharpest rally since the Great Depression, the overall trend in the markets is still down. If your investment strategy is fully invested, un-hedged and exclusively long, you're taking an extraordinary risk in today's market.
There is no doubt we are in the worst economy in decades. Corporate earnings are falling. Unemployment is rising. The banks are insolvent. And government is taking up a larger and larger slice of the economy - not a good sign for a growth in productivity.
And all of this has been reflected in the market. By the end of this year, we are likely to have the first 10-year period in history when the Dow has declined. Yes, even after the recent rally the Dow is about below where it was 9 years ago.
But what is bad for the economy and terrible for the market does not have to wreak havoc on your investments. By following the two tenets above and employing the right strategies, you can multiply your wealth safely in just about ANY market. In fact, there are a number of strategies that have never been as safe or as profitable as they are today.
If you expect success in the markets in the years ahead, begin to think of yourself as an investor AND a trader.
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Created on Dec 31st 1969 19:00. Viewed 0 times.
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