A Strong Trading Mind
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Add these to your Trading Journal
http://www.babypips.com/blogs/pipsy...b&utm_medium=timeline&utm_campaign=fbtimeline
Traders keep track of these variables and statistics to help them track their performance and identify areas for improvement.
Now, I’d like to focus on some of the other statistics that tend to be overlooked but can provide critical insight on one’s trading.
1. Holding time
Do you tend to hold trades for more than a day? Or do you only hold your trades open for hours at a time? Knowing how long on average you hold your trades will tell you what trading techniques and styles you’re most comfortable with, and it will help you determine whether you’re a short-term trader or a long-term trader.
Scalpers tend to jump in and out of traders very quickly, while position traders may hold on to trades for months or even years! Knowing which type of trader you are will help you make the proper adjustments to optimize your personal trading strategy.
2. Holding time of winners vs. holding time of losers
Now let’s go one level deeper and compare holding time of winners versus holding time of losers. Doing so will tell us whether or not we’re cutting trades too early or holding trades for too long. As much as possible, we’d like to avoid holding on to losers and low-yielding trades as they tie up precious capital!
3. Winners and Losers broken down by session
Another time-based metric that you can take note off is WHEN you actually trade.
Breaking down your trades into which session you are trading could help you determine the best session for you to trade. You might reside in Asia but realize that all your winning trades come during the London session. It might be advisable to clock in a few extra hours to squeeze those pips!
4. Winners/Losers broken down by market conditions
This metric will help determine whether you are recognizing the shifting market conditions and taking advantage of it. You will see whether you’ve been able to take advantage of the recent trend by hoping in on retracements or if you’ve been stubborn, getting burned trying to pick tops and bottoms.
It could also reveal your optimal trading conditions. If the metric shows that you’ve been having more winners in ranging conditions, it may indicate that you prefer to play consolidation behavior with support-and-resistance levels. Or if you’ve been making money by playing breakouts, it could mean that you prefer to trade the news or take momentum setups.
5. Winners/ Losers broken down by position size
Unlike the sports cliché, when it starts getting serious in forex trading, SIZE DOES MATTER. Keeping track of how big your positions are could provide valuable insight as to how you react when positions sizes change. It could reveal whether or not you are taking advantage of strong trends by increasing your size, or doing a poor job of recognizing choppy markets and not scaling down.
There are just some of the many performance metrics that traders tend to overlook. In the end though, it is up to YOU to decide which ones will be the most useful to you. Just keep in mind that the more detailed your trading journal is, the better the chances are of you determining what is the key difference between winning and losing.
Most importantly, you have to always remember to update your journal CONSISTENTLY and HONESTLY. Keeping a trade journal is a tedious task but it must be done because it is the only path towards improvement. Remember, the difference between an ordinary trader and an extraordinary one is that little EXTRA effort, done day-in and day-out!
http://www.babypips.com/blogs/pipsy...b&utm_medium=timeline&utm_campaign=fbtimeline
Traders keep track of these variables and statistics to help them track their performance and identify areas for improvement.
Now, I’d like to focus on some of the other statistics that tend to be overlooked but can provide critical insight on one’s trading.
1. Holding time
Do you tend to hold trades for more than a day? Or do you only hold your trades open for hours at a time? Knowing how long on average you hold your trades will tell you what trading techniques and styles you’re most comfortable with, and it will help you determine whether you’re a short-term trader or a long-term trader.
Scalpers tend to jump in and out of traders very quickly, while position traders may hold on to trades for months or even years! Knowing which type of trader you are will help you make the proper adjustments to optimize your personal trading strategy.
2. Holding time of winners vs. holding time of losers
Now let’s go one level deeper and compare holding time of winners versus holding time of losers. Doing so will tell us whether or not we’re cutting trades too early or holding trades for too long. As much as possible, we’d like to avoid holding on to losers and low-yielding trades as they tie up precious capital!
3. Winners and Losers broken down by session
Another time-based metric that you can take note off is WHEN you actually trade.
Breaking down your trades into which session you are trading could help you determine the best session for you to trade. You might reside in Asia but realize that all your winning trades come during the London session. It might be advisable to clock in a few extra hours to squeeze those pips!
4. Winners/Losers broken down by market conditions
This metric will help determine whether you are recognizing the shifting market conditions and taking advantage of it. You will see whether you’ve been able to take advantage of the recent trend by hoping in on retracements or if you’ve been stubborn, getting burned trying to pick tops and bottoms.
It could also reveal your optimal trading conditions. If the metric shows that you’ve been having more winners in ranging conditions, it may indicate that you prefer to play consolidation behavior with support-and-resistance levels. Or if you’ve been making money by playing breakouts, it could mean that you prefer to trade the news or take momentum setups.
5. Winners/ Losers broken down by position size
Unlike the sports cliché, when it starts getting serious in forex trading, SIZE DOES MATTER. Keeping track of how big your positions are could provide valuable insight as to how you react when positions sizes change. It could reveal whether or not you are taking advantage of strong trends by increasing your size, or doing a poor job of recognizing choppy markets and not scaling down.
There are just some of the many performance metrics that traders tend to overlook. In the end though, it is up to YOU to decide which ones will be the most useful to you. Just keep in mind that the more detailed your trading journal is, the better the chances are of you determining what is the key difference between winning and losing.
Most importantly, you have to always remember to update your journal CONSISTENTLY and HONESTLY. Keeping a trade journal is a tedious task but it must be done because it is the only path towards improvement. Remember, the difference between an ordinary trader and an extraordinary one is that little EXTRA effort, done day-in and day-out!
Create peace in your mind, order in your life and strength in your body. Actively commit to at least one new strategy (which you have not used in the past 90 days) that can shield you from the anxieties and stresses of daily life. Give your time, attention and focus to this new practice for at least 10 minutes every day for the next 14 days. You will transform your life, increase your skills of resiliency and mindful thinking.
Dis-ease exists when your daily choices and practices are in conflict with what your body requires for energy, vitality and life. Choose life today...by renewing your mind, choosing real food to fuel your body, exercising and moving your muscles, developing rituals for at least 7 hours of sleep and nourishing your soul. You Deserve!
—Les Brown
Dis-ease exists when your daily choices and practices are in conflict with what your body requires for energy, vitality and life. Choose life today...by renewing your mind, choosing real food to fuel your body, exercising and moving your muscles, developing rituals for at least 7 hours of sleep and nourishing your soul. You Deserve!
—Les Brown
I also think that pre-determined expectation of portfolio returns affects my trading very much. For instance, If I want to make 50% annually, It will effect the way I handle winning trades. Many times I have cut them short because of a feeling "Oh I have booked 3%" It's good enough in one stock.
Anyone agree?
Anyone agree?
No amount will ever be good enough.It depends on what your level of satisfaction is.
A good blog article on this.
How Much Money Do You Really Need
http://bclund.com/2013/06/02/so-you-want-to-trade-for-a-living-how-much-money-do-you-really-need/
Determining the amount of money you need to start down the path of trading for a living is a complex process and one for which there are no shortcuts. The biggest and most lethal mistake that traders make when they decide to go “full-time” is being undercapitalized. It will be your “patient zero” of mistakes, from which all others will be spawned.
….but that’s not how this works. Fear not though, for just as there is a way to determine your correct position sizing by reverse engineering the process, we can do the same with this conundrum.
Quality of Life
First, let’s begin at the end, so ask yourself, “how much money do I need to make in order to support my desired quality of life?” You will see that I have phrased this question in a very specific way. It asks you to think. To think about what your “desired” quality of life is. This is key because depending on the stage and circumstances of your life, you may have some flexibility in this area that will help you to reach an acceptable answer to this question.
Are you early in your earning years, unmarried, with no children, mortgage, or student loans to service? Are you supporting a family and a debt structure, close enough to see the retirement train, still off in the distance, but definitely coming down the tracks? Or are you somewhere in between those two examples? Wherever you are, you need to decide what you need to make in order to have piece of mind, financial stability, and ideally the ability to grow your net worth.
Once you have that number in place, then you have to determine what amount of capital is needed in order to generate that number based upon a reasonable return on a percentage basis. If you have prepared for your move into full-time trading as I outlined in my previous post in this series, then you should already have a rough idea of what that percentage return will be on average.
The Pure Play
Let’s start with the most conservative and straightforward approach that assumes no leverage, meaning you open a margin account in order to have buying power returned immediately when a position is sold, but you don’t use that leverage.
So for example, if you have been averaging 20% return for the last five years, and you need to make $50,000 a year in order to support your desired quality of life, then the magic number for you is $250,000 of working capital. But wait, there’s more.
Throw an extra 20% onto that number to give you some cushion….that makes it $300,000. But there’s still more.
You need to have a minimum of one year’s expenses saved in order to start your new venture without the daily pressure of knowing that every one of your trades is being done “to make the rent.” Now you are up to $350,000. This is fun isn’t it?
Sure, it’s a lot of money to some, but this scenario will give you the most piece of mind and ideally a longer runway in which to achieve consistent profitability. This number will obviously change based upon what your actual average return has been and the amount of money you need for maintain your desired lifestyle. Make 40% on a regular basis the number goes down, but if you need $100,000 to stay in pretzels and beer, then it goes up.
But What About Margin?
Many of you are saying to yourself, “Brian, what about the magical powers of margin? Why do I need so much money when I can get 2x buying power for swings and 4x for day trading?” Good question. Let’s take a closer look at this *****-goddess of trading.
There is no doubt that the proper use of margin can enable you to reduce the amount of capital you need to sustain your desired lifestyle, but….
In most cases you are about to go from the security and piece of mind of knowing that every two weeks you will be getting a paycheck to an environment where you may have a whole month where you don’t make any money. Maybe even a whole quarter. Even wackier than that, when was the last time you got your company paycheck and it said you actually owed them money?
The mental transition that goes along with starting to trade full-time can be perilous. You think you know how you will handle it, but you really don’t until you get there. Do you really want to start this, well let’s just be frank, risky venture, having to leverage up your account equity? Margin can make you money fast, but if can lose you money even faster if it is not used correctly as part of a risk based methodology.
The ideal situation would be to go into full-time trading fully capitalized, and then once you have completely transitioned and become comfortable with your new career, only then begin increasing your use of leverage while freeing up and segregating your excess capital from your trading activities.
The Wing and a Prayer
But let’s just assume, in theory of course, that you think you are the next coming of Marty “Buzz” Schwartz, and are going to crush it right out of the gate. You want to know the bare minimum that you would need to proceed, right?
There are traders that I personally know who support their desired lifestyle with only $5,000 in trading capital. Yes, you read that right. Five thousand measly dollars, but that is because they trade with a prop shop that gives them 10:1 leverage on their money.
And they day trade only, with the goal of chopping out between $800 and $1200 from the market on a daily basis. With the markets open an average of 250 day per year they are shooting for $200,000-$300,000 annually.
But these are highly focused traders with a style they have perfected and are comfortable with. They are like machines who don’t chase red herrings or the latest stock being profiled on CNBC. Is that how you are currently trading?
If so, then by all means feel free to jump in short-stacked. I would still highly recommend that you have a least one full year’s worth of money set aside, separate from your trading capital, and that you find a reputable shop who will give you the needed leverage. Best of luck to you.
The Average Joe
In all honesty, this is the category that most are going to fall into; not having the ability or desire to do the full “Pure Play” but having at least enough common sense not to try to attempt the “Wing and a Prayer” option. You are going to come in with a decent chunk of change, but you will probably have to use overnight or day trading margin on a semi-regular basis. If that is you, then as much as I hate to do this to you, I am going to have to answer this blog post’s title question by revisiting previous questions. Questions you need to ask yourself and honestly answer.
And most importantly…..
What amount of money do I feel I need to start with to HONESTLY GIVE ME A FIGHTING CHANCE AT SUCCESS?
You will notice that I have overused the term “honestly” here in this section because everything thing else I am talking about doesn’t matter if you are not honest with yourself in determining not only you lifestyle and financial needs, but your trading ability and mental toughness.
Don’t get me wrong, I’m not saying that you must have no doubts, and believe 110% in your conviction that “everything will work out.” Nothing in life is a sure thing, and I don’t want the normal question marks that are a part of every major life decision, from changing careers, to getting married, to having kids, to deter you, I just want to make sure you take this decision with your eyes wide open.
A good blog article on this.
How Much Money Do You Really Need
http://bclund.com/2013/06/02/so-you-want-to-trade-for-a-living-how-much-money-do-you-really-need/
Determining the amount of money you need to start down the path of trading for a living is a complex process and one for which there are no shortcuts. The biggest and most lethal mistake that traders make when they decide to go “full-time” is being undercapitalized. It will be your “patient zero” of mistakes, from which all others will be spawned.
….but that’s not how this works. Fear not though, for just as there is a way to determine your correct position sizing by reverse engineering the process, we can do the same with this conundrum.
Quality of Life
First, let’s begin at the end, so ask yourself, “how much money do I need to make in order to support my desired quality of life?” You will see that I have phrased this question in a very specific way. It asks you to think. To think about what your “desired” quality of life is. This is key because depending on the stage and circumstances of your life, you may have some flexibility in this area that will help you to reach an acceptable answer to this question.
Are you early in your earning years, unmarried, with no children, mortgage, or student loans to service? Are you supporting a family and a debt structure, close enough to see the retirement train, still off in the distance, but definitely coming down the tracks? Or are you somewhere in between those two examples? Wherever you are, you need to decide what you need to make in order to have piece of mind, financial stability, and ideally the ability to grow your net worth.
Once you have that number in place, then you have to determine what amount of capital is needed in order to generate that number based upon a reasonable return on a percentage basis. If you have prepared for your move into full-time trading as I outlined in my previous post in this series, then you should already have a rough idea of what that percentage return will be on average.
The Pure Play
Let’s start with the most conservative and straightforward approach that assumes no leverage, meaning you open a margin account in order to have buying power returned immediately when a position is sold, but you don’t use that leverage.
So for example, if you have been averaging 20% return for the last five years, and you need to make $50,000 a year in order to support your desired quality of life, then the magic number for you is $250,000 of working capital. But wait, there’s more.
Throw an extra 20% onto that number to give you some cushion….that makes it $300,000. But there’s still more.
You need to have a minimum of one year’s expenses saved in order to start your new venture without the daily pressure of knowing that every one of your trades is being done “to make the rent.” Now you are up to $350,000. This is fun isn’t it?
Sure, it’s a lot of money to some, but this scenario will give you the most piece of mind and ideally a longer runway in which to achieve consistent profitability. This number will obviously change based upon what your actual average return has been and the amount of money you need for maintain your desired lifestyle. Make 40% on a regular basis the number goes down, but if you need $100,000 to stay in pretzels and beer, then it goes up.
But What About Margin?
Many of you are saying to yourself, “Brian, what about the magical powers of margin? Why do I need so much money when I can get 2x buying power for swings and 4x for day trading?” Good question. Let’s take a closer look at this *****-goddess of trading.
There is no doubt that the proper use of margin can enable you to reduce the amount of capital you need to sustain your desired lifestyle, but….
In most cases you are about to go from the security and piece of mind of knowing that every two weeks you will be getting a paycheck to an environment where you may have a whole month where you don’t make any money. Maybe even a whole quarter. Even wackier than that, when was the last time you got your company paycheck and it said you actually owed them money?
The mental transition that goes along with starting to trade full-time can be perilous. You think you know how you will handle it, but you really don’t until you get there. Do you really want to start this, well let’s just be frank, risky venture, having to leverage up your account equity? Margin can make you money fast, but if can lose you money even faster if it is not used correctly as part of a risk based methodology.
The ideal situation would be to go into full-time trading fully capitalized, and then once you have completely transitioned and become comfortable with your new career, only then begin increasing your use of leverage while freeing up and segregating your excess capital from your trading activities.
The Wing and a Prayer
But let’s just assume, in theory of course, that you think you are the next coming of Marty “Buzz” Schwartz, and are going to crush it right out of the gate. You want to know the bare minimum that you would need to proceed, right?
There are traders that I personally know who support their desired lifestyle with only $5,000 in trading capital. Yes, you read that right. Five thousand measly dollars, but that is because they trade with a prop shop that gives them 10:1 leverage on their money.
And they day trade only, with the goal of chopping out between $800 and $1200 from the market on a daily basis. With the markets open an average of 250 day per year they are shooting for $200,000-$300,000 annually.
But these are highly focused traders with a style they have perfected and are comfortable with. They are like machines who don’t chase red herrings or the latest stock being profiled on CNBC. Is that how you are currently trading?
If so, then by all means feel free to jump in short-stacked. I would still highly recommend that you have a least one full year’s worth of money set aside, separate from your trading capital, and that you find a reputable shop who will give you the needed leverage. Best of luck to you.
The Average Joe
In all honesty, this is the category that most are going to fall into; not having the ability or desire to do the full “Pure Play” but having at least enough common sense not to try to attempt the “Wing and a Prayer” option. You are going to come in with a decent chunk of change, but you will probably have to use overnight or day trading margin on a semi-regular basis. If that is you, then as much as I hate to do this to you, I am going to have to answer this blog post’s title question by revisiting previous questions. Questions you need to ask yourself and honestly answer.
- How much do I need/wish to make per year to live my desired quality of life?
- How much reserves, separate from my trading funds, and do I need for piece of mind?
- Am I comfortable/disciplined enough to use margin right out of the gate?
- What trading style am I most comfortable/successful with and what capital requirements does it necessitate?
And most importantly…..
What amount of money do I feel I need to start with to HONESTLY GIVE ME A FIGHTING CHANCE AT SUCCESS?
You will notice that I have overused the term “honestly” here in this section because everything thing else I am talking about doesn’t matter if you are not honest with yourself in determining not only you lifestyle and financial needs, but your trading ability and mental toughness.
Don’t get me wrong, I’m not saying that you must have no doubts, and believe 110% in your conviction that “everything will work out.” Nothing in life is a sure thing, and I don’t want the normal question marks that are a part of every major life decision, from changing careers, to getting married, to having kids, to deter you, I just want to make sure you take this decision with your eyes wide open.
Are you a seasoned investor?
http://lifehacker.com/six-rookie-po...rce=lifehacker_facebook&utm_medium=socialflow
Take these six common blunders that even experienced investors tend to make.
Rookie Mistake #1: Investing Without Purpose
Passionate investors are often glued to the financial news so they can glean more insight on what exactly to invest in. Maybe Company X has a game-changing product in development or Industry Y is showing strong market growth—and they want to get involved as soon as possible.
But it's important to take a step back before taking the plunge. "A lot of people do good research on their own and identify solid funds," says Chad Carlson, a CFP® with Balasa Dinverno Foltz. "But what's the goal of their portfolio and how do those funds fit in? Does this make sense?"
In other words, consider asking yourself: Am I seeking growth? Do I want stability? Do I want dividends? What, eventually, do I want to tap this money for—retirement or some other savings goal?
Answering these questions will help you decide whether that "great" investment makes sense to add to your total mix. Remember: Your whole portfolio should reflect your risk tolerance, goals and timeline. So if any changes you make skew your portfolio too heavily in one direction, be prepared to reconsider whether to make the investment or be willing to rebalance accordingly.
Rookie Mistake #2: Not Being Fully Aware of Risk
Many investors say they have a low tolerance for risk, and that may be true in one part of their money life. But, in other ways, they may be inadvertently exposing themselves to more risk than they realize.
Take retirement accounts.Many people tend to be too conservative with their 401(k) allocations, mostly because they'll pick from the options that are laid out for them, rather than basing their decision-making on how far away retirement is for them.
"Most clients are given a list of choices, and rather than even attempt to choose, they either default to one of the target funds or the fixed income [option],". Even with a target date fund, which rebalances a portfolio for you based on a set retirement date, you still need to pay attention to the investment mix because some funds with a soon-ish target date may be more heavily weighted in bonds than you may prefer.
Meanwhile, in another part of their portfolio, that same "conservative" 401(k) investor might, say, hold a large number of shares in a single stock simply because they believe in the company or have some other attachment to it.
"So although they might be willing to accept drastic price fluctuations there, they are unwilling to tolerate the same volatility elsewhere," says David Shotwell, a CFP® with Rutter Baer. "At the same time, they are ignoring the risks that go with investing in a concentrated position that lacks diversification."
Bottom line? Your risk should reflect the investing goal you're trying to achieve, the timeline by which you want to achieve it and your tolerance for fluctuations. It's O.K. to have different levels of risk for different goals like retirement or investing for a home down payment. But within that goal's portfolio, consider balancing your need for growth with your desire to not lose sleep at night over volatility in the markets.
Rookie Mistake #3: Making Emotional Decisions
Seasoned investors may think they're no longer affected by the ups and downs of the market, but in reality, few of us are totally immune. "What I see is that even if [investors] are experienced, their emotions can still get involved" in the decision-making process, says Brian Frederick, a CFP® with Stillwater Financial Partners.
That's partially because of recency bias—a tendency to believe that investments will continue to perform the way they have in the recent past. "Sometimes it's easy to get caught up and assume that what's been happening for the last three months is going to happen indefinitely," Frederick says, adding that this can make someone want to sell investments when the market dips.
So just remember that no one can time the market—not even the professionals—and since you're likely investing for the long haul, it's better to stay invested than to pull out in a panic.
In fact, research shows the U.S. stock market has never lost money over a 20-year period. By contrast, if you'd put money into the stock market in 2008, and then pulled out by year's end because of the market crash, you'd have lost 37%—and missed out on the record rallies of 2013.
So if you have decades before you need to tap your investments, try to stay the course and stick to the overall plan you've set for yourself. "When things are going down, even though it makes you feel better to sell," Frederick says, "it's not the right thing to do in the long run."
Rookie Mistake #4: Acting on a "Hot Tip"
It often happens at parties: Your uncle's cousin's husband hit it big after investing in that next-big-thing IPO. Or a friend of a friend insists you must start hoarding gold.
It's tempting to want to jump on an opportunity, but if your friends and family really had all the answers, they'd be on the cover of Fortune magazine. So keep in mind that your "investing expert" friends "will tell you about every good investment they've made, [but] they will never tell you about their bad investments," Toal says. "This creates a false emotional aspect in your brain that they know what they're doing."
In other words, take that investing advice with a grain of salt. "I always tell clients, 'Your plan isn't going to succeed based on whether you do or don't buy this investment," Toal says. "More often than not, the hot tips do not work out. It's just not worth the risk."
Rookie Mistake #5: Forgetting About Fees
No matter what your experience level, there's one thing both beginner and seasoned investors can agree on: Fees can leave you dumbfounded.
One survey found that nine out of 10 Americans severely underestimate how much they pay in 401(k) fees, and with about 28 different ones to watch for—administrative fees, management fees, sales charges, to name a few—who can keep track?
And remember that every time you buy or sell an investment, you may be paying a price that eats into your returns: One study found that investors in mutual funds actually pay more in trading costs than they do in expense ratios (a fund's operating fees).
Exchange-traded funds, in particular, make it easy for investors to trade effortlessly and frequently because they can be traded throughout the day like a stock. Unfortunately, the ability to make such reactive moves also makes it easy to rack up transaction fees in the process, warns Carlson.
It may take a little detective work, but put in the effort to uncover what types of fees you are responsible for within your portfolio. You can do this by checking out your fund's prospectus and reading through the fine print. And if you're unsure about the costs you're paying, ask your brokerage firm for a full fee schedule.
Rookie Mistake #6: Ignoring Tax Implications
You may not be an accountant, but it might be worth consulting one when you're dealing with taxes and investments.
Investing can be intimidating, and the extra tax rules can turn it into an even bigger, confusing.
In some instances, your investment accounts may offer some tax benefits. For instance, what you contribute to a 401(k) or IRA can lower your taxable income today, although you'll be taxed on the withdrawals in retirement. Or if you anticipate you'll be in a higher tax bracket when you're older, a Roth IRA or Roth 401(k) might be better because you'll pay taxes on contributions now, but your earnings can be withdrawn tax-free in retirement.
If you're thinking about saving for retirement, you probably know that an individual…
However, with investments you hold in brokerage accounts, you've got capital gains taxes to think about. So although you may have made a decent return selling that stock, was it worth the capital gains tax you had to pay? Or did it, for the most part, nullify the benefits of selling? Plus, the capital gains taxes you pay will depend, in part, on whether you've held the stock for less than a year or longer than a year, so note that the timing of your sale makes a difference.
It's not an easy maze to navigate, so make sure you're up-to-date on your short- and long-term capital gains rates—which vary depending on your tax bracket—and how your current retirement mix may affect both your present and future tax returns.
http://lifehacker.com/six-rookie-po...rce=lifehacker_facebook&utm_medium=socialflow
Take these six common blunders that even experienced investors tend to make.
Rookie Mistake #1: Investing Without Purpose
Passionate investors are often glued to the financial news so they can glean more insight on what exactly to invest in. Maybe Company X has a game-changing product in development or Industry Y is showing strong market growth—and they want to get involved as soon as possible.
But it's important to take a step back before taking the plunge. "A lot of people do good research on their own and identify solid funds," says Chad Carlson, a CFP® with Balasa Dinverno Foltz. "But what's the goal of their portfolio and how do those funds fit in? Does this make sense?"
In other words, consider asking yourself: Am I seeking growth? Do I want stability? Do I want dividends? What, eventually, do I want to tap this money for—retirement or some other savings goal?
Answering these questions will help you decide whether that "great" investment makes sense to add to your total mix. Remember: Your whole portfolio should reflect your risk tolerance, goals and timeline. So if any changes you make skew your portfolio too heavily in one direction, be prepared to reconsider whether to make the investment or be willing to rebalance accordingly.
Rookie Mistake #2: Not Being Fully Aware of Risk
Many investors say they have a low tolerance for risk, and that may be true in one part of their money life. But, in other ways, they may be inadvertently exposing themselves to more risk than they realize.
Take retirement accounts.Many people tend to be too conservative with their 401(k) allocations, mostly because they'll pick from the options that are laid out for them, rather than basing their decision-making on how far away retirement is for them.
"Most clients are given a list of choices, and rather than even attempt to choose, they either default to one of the target funds or the fixed income [option],". Even with a target date fund, which rebalances a portfolio for you based on a set retirement date, you still need to pay attention to the investment mix because some funds with a soon-ish target date may be more heavily weighted in bonds than you may prefer.
Meanwhile, in another part of their portfolio, that same "conservative" 401(k) investor might, say, hold a large number of shares in a single stock simply because they believe in the company or have some other attachment to it.
"So although they might be willing to accept drastic price fluctuations there, they are unwilling to tolerate the same volatility elsewhere," says David Shotwell, a CFP® with Rutter Baer. "At the same time, they are ignoring the risks that go with investing in a concentrated position that lacks diversification."
Bottom line? Your risk should reflect the investing goal you're trying to achieve, the timeline by which you want to achieve it and your tolerance for fluctuations. It's O.K. to have different levels of risk for different goals like retirement or investing for a home down payment. But within that goal's portfolio, consider balancing your need for growth with your desire to not lose sleep at night over volatility in the markets.
Rookie Mistake #3: Making Emotional Decisions
Seasoned investors may think they're no longer affected by the ups and downs of the market, but in reality, few of us are totally immune. "What I see is that even if [investors] are experienced, their emotions can still get involved" in the decision-making process, says Brian Frederick, a CFP® with Stillwater Financial Partners.
That's partially because of recency bias—a tendency to believe that investments will continue to perform the way they have in the recent past. "Sometimes it's easy to get caught up and assume that what's been happening for the last three months is going to happen indefinitely," Frederick says, adding that this can make someone want to sell investments when the market dips.
So just remember that no one can time the market—not even the professionals—and since you're likely investing for the long haul, it's better to stay invested than to pull out in a panic.
In fact, research shows the U.S. stock market has never lost money over a 20-year period. By contrast, if you'd put money into the stock market in 2008, and then pulled out by year's end because of the market crash, you'd have lost 37%—and missed out on the record rallies of 2013.
So if you have decades before you need to tap your investments, try to stay the course and stick to the overall plan you've set for yourself. "When things are going down, even though it makes you feel better to sell," Frederick says, "it's not the right thing to do in the long run."
Rookie Mistake #4: Acting on a "Hot Tip"
It often happens at parties: Your uncle's cousin's husband hit it big after investing in that next-big-thing IPO. Or a friend of a friend insists you must start hoarding gold.
It's tempting to want to jump on an opportunity, but if your friends and family really had all the answers, they'd be on the cover of Fortune magazine. So keep in mind that your "investing expert" friends "will tell you about every good investment they've made, [but] they will never tell you about their bad investments," Toal says. "This creates a false emotional aspect in your brain that they know what they're doing."
In other words, take that investing advice with a grain of salt. "I always tell clients, 'Your plan isn't going to succeed based on whether you do or don't buy this investment," Toal says. "More often than not, the hot tips do not work out. It's just not worth the risk."
Rookie Mistake #5: Forgetting About Fees
No matter what your experience level, there's one thing both beginner and seasoned investors can agree on: Fees can leave you dumbfounded.
One survey found that nine out of 10 Americans severely underestimate how much they pay in 401(k) fees, and with about 28 different ones to watch for—administrative fees, management fees, sales charges, to name a few—who can keep track?
And remember that every time you buy or sell an investment, you may be paying a price that eats into your returns: One study found that investors in mutual funds actually pay more in trading costs than they do in expense ratios (a fund's operating fees).
Exchange-traded funds, in particular, make it easy for investors to trade effortlessly and frequently because they can be traded throughout the day like a stock. Unfortunately, the ability to make such reactive moves also makes it easy to rack up transaction fees in the process, warns Carlson.
It may take a little detective work, but put in the effort to uncover what types of fees you are responsible for within your portfolio. You can do this by checking out your fund's prospectus and reading through the fine print. And if you're unsure about the costs you're paying, ask your brokerage firm for a full fee schedule.
Rookie Mistake #6: Ignoring Tax Implications
You may not be an accountant, but it might be worth consulting one when you're dealing with taxes and investments.
Investing can be intimidating, and the extra tax rules can turn it into an even bigger, confusing.
In some instances, your investment accounts may offer some tax benefits. For instance, what you contribute to a 401(k) or IRA can lower your taxable income today, although you'll be taxed on the withdrawals in retirement. Or if you anticipate you'll be in a higher tax bracket when you're older, a Roth IRA or Roth 401(k) might be better because you'll pay taxes on contributions now, but your earnings can be withdrawn tax-free in retirement.
If you're thinking about saving for retirement, you probably know that an individual…
However, with investments you hold in brokerage accounts, you've got capital gains taxes to think about. So although you may have made a decent return selling that stock, was it worth the capital gains tax you had to pay? Or did it, for the most part, nullify the benefits of selling? Plus, the capital gains taxes you pay will depend, in part, on whether you've held the stock for less than a year or longer than a year, so note that the timing of your sale makes a difference.
It's not an easy maze to navigate, so make sure you're up-to-date on your short- and long-term capital gains rates—which vary depending on your tax bracket—and how your current retirement mix may affect both your present and future tax returns.
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