I am still new to self-managed investing, but I have a few things to share with other new investors that may shorten your learning curve. You will hear the same things many other places, but perhaps not all in the same place:
- Greed Kills! I think the best way to keep greed from tricking you into making mistakes is to set goals for yourself and stick to them most of the time. For me, this means setting a goal of 5% to 10% on an investment and then selling when I reach that goal. It may take a long time or may be just one day depending on what the investment is. If you do this then you will have no losing investments. You may be losing out on additional profit, but you have to decide if that is worth the risk of missing the time to sell at what you could have made. I will say that there may be times when all the signs point to increased gains. In that case you may hold off selling, but I suggest you put in a stop loss order so that the holding will sell if it goes down too much. As long as you make a profit on an investment, you should not regret what “could have been”. Learn from the experience for next time and maybe take a little risk.
Try to control your greed. Set your goals and try to not be tempted to go beyond them unless you feel pretty sure based on facts that indicate otherwise.
- Don’t Fear The Reaper! What I mean by this is new investors are nervous and may sell too quickly. If you make a profit this is not all that bad. But after a while you need to trust your experience more and try to hold on for your goal. My goal is 5% to 10% and over the past few months I have sold off at 5% because I had been waiting for quite some time and was not sure if the investment was going to drop before hitting 10%. If you find there has been too much worry with an investment, then I encourage you to get out when you can take some profit. DON’T keep checking the stock after you sell (Easy to say, hard to not do it). If the stock dropped you will feel all warm inside, but if the stock went hire you will feel like an idiot. Both these feelings are dangerous. If you feel smart you may get overconfident and make a bad mistake next time. If you feel bad you create more worry for the next time.
Make a plan and try to stick with it. This should help you to have less fear and avoid the mistakes that fear can cause.
- Use play money, even after you start using real money. Once you feel you want to start investing for real, still do a little playing to see how things work and how your picks turn out. This will reduce your actual risk, while adding to your experience (if not your bottom line). I got over confident after some nice trades and discovered that I didn’t really know as much as I thought I did. All investments have risks and are easily affected by things we can’t foresee or understand. Keep learning.