In the world of investments, attitude counts for a lot. Why is that, you may be asking? The answer is simple: in investing, it’s important that your decisions be founded exclusively on information and reasons pertinent to that investment. You never want to put yourself in the situation where you end up making a decision on an investment based on completely extraneous and irrelevant matters. Hence the saying “Plan the trade, and trade the plan.” I’ve listed some points which may help you with this.
1. Only invest with money that is not and will not be destined for basic living expenses. Even if the money is needed only several months down the line do not even think of using it for an investment. The reason for this is that if you do invest that money, subsequent decisions on the investment will be shaped by basic living expense needs, which strictly speaking is not a factor pertinent to the investment.
As an example, let’s say that the money in question needs to go to a repayment on your mortgage loan which is due in about three months. Luck may just have it that the investment you made takes a sudden fall on the precise week of your repayment. In ideal circumstances you would let the investment continue its course, give it the time to bounce back; but since you are strapped for cash and have a payment looming, you close it. Ultimately, your decision was driven by factors irrelevant to the investment and a loss results. The lesson here is that one only invests money which they do not need to get by.
2. When you invest your money, it may help you to imagine that that money is completely lost as soon as you invest it. Quite often investments look like they are going bad before they turn around. It just happens as part of the typical fluctuations of the investment market. Many a good investment has been turned into a bad one by people (me included) who get scared and close a trade, instead of giving it the time to complete successfully.
If you convince yourself the money is gone when you invest it, its much easier to avoid getting the jitters during these times. (And let me tell you, there is nothing worse than closing a trade early for a loss, only to watch it turn around and become successful, if only you had let it run its course.)
3. Another part of your attitude as an investor must be the recognition that failed investments are just a part of the game. Any investor will incur losses at one point or another during their track record; what’s important is to know how to react to those losses in the right way, with the right attitude. Letting them affect you in disproportionate measure will keep you from ever becoming a savvy investor in the long term. Below are two very helpful ways for viewing unsuccessful trades:
3a). Instead of looking at your portfolio as a series of individual investments, think of them as a group or a totality. Imagine that based on a certain investment strategy you are running, four out of every five investments runs a profit (which alternatively means that one out of five is a loss). Instead of considering the losing investment as independent of the other four, rack all five up together in terms of net profit and then divide that by five, not four. The answer, which is your profit per trade, must reflect on all trades in the strategy and in that sense, 20% of the final net profit is courtesy of the failed trade. Remember: if it’s a necessary part of the overall strategy, it is not strictly a loss.
In this manner, you save yourself from abandoning a good method simply for fear of small failures.
3b). Consider the losses you make as educational expenses. Most folks dedicated to the industry of finance have dedicated many years and thousands of dollars on educating themselves on the matter at prestigious universities, getting a grip on the trade. The equivalent for somebody striking up in the field from zero is a series of unsuccessful trades. This implies though you actually learn from them. This must be done professionally and objectively, without emotions, otherwise you will never make the cut and will miss out on lucrative long term gains through investments.
Investment work and the markets are known for being able to bring out people’s best and worst features. Thus, controlling one’s emotional and irrational reactions is fundamental so that they don’t cloud decisions. As the saying goes: “Plan the trade, and trade the plan.
Damian Papworth invests for his lifestyle and his family. Not too long ago he investigated baby high chairs. He put a website together with his findings on high chairs for babies.