Notes About Business

Attitude with investing is so important. “Why?” you ask. Its simple really. When investing, you want all your decisions to be made on the information relating to the investment and for reasons specific to the investment. You do not want to find yourself in the position where you are making decisions about an investment, because of factors which are irrelevant to the investment. Thus the adage, “Plan the trade, and trade the plan”. Here are a few pointers which may help.

1. Never invest money you need to use for your living expenses. Even if you don’t need this money this month, next month, but you know you’ll need it in 3 months, don’t invest it. If you put money in any investment market that you need to pay for your living expenses, at some stage you will need to make a decision about that investment, due to your living expense commitments.

For example, Lets say you need that money in 3 months to pay a mortgage repayment. Your investment may temporarily drop on the very week you need the money. In this situation, the correct decision, based on your strategy, could be to hold for another week. But because you have the mortgage, you make the decision to close the investment. This decision was made on information which was irrelevant to the investment and ended up ruining the trade and causing a loss. This issue would never exist if you only invested money you didn’t need.

2. When making investments, it is often a helpful technique to imagine to yourself that that money has been completely lost the minute you invested it. The simple reality is that many investments look bad before they end up looking good, which is simply due to the normal fluctuations in investment markets. Countless investments have been ruined by people (myself included) who chickened out too soon and didn’t allow the investment to come to fruition in time.

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). Don’t look at trades individually, rather look at your trades as a group object. For example, you may have a strategy that works four out of five trades. One out of five trades on average makes a loss. What you need to do is tally your net profit over all five trades, including the loss, and divide this by five. The result is your profit per trade. If you do this, you can actually view your losing trades as profit earners. IE. You attribute 20% of your five trade net result to the unsuccessful trade, simply because it is a crucial part of a successful strategy.

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.

The investment markets, any of them, can bring out the best and worst of your emotions. It is ultra important to get these under control so they don’t impact your investment decisions. Remember, Plan the trade, and trade the plan.

Damian Papworth makes investments for his lifestyle and his family. Recently he researched baby high chairs. He created a website with his analysis on high chairs for babies.