The current market optimism with deteriorating economics on the background is worrying, to say the least. However, with the right mindset and a long-term investing strategy, we should be just fine.
This is why now we should be focusing on risk control and avoiding rushed decisions. The Central Bank’s interventions aimed at increasing liquidity no matter what are misleading investors by giving them a false sense of security.
First, let’s discuss the risk connected to investing. We can think of two types: to lose money and to miss an opportunity. You can avoid one of them, but not both at the same time. It’s up to you whether you want to play safe and potentially lose an opportunity or take an active approach and risk losing money.
Being cautious and mature seems old-fashioned to some. So when asked whether they are willing to risk to get rich, they usually say yes. How should one act to get profit?
It is a trait of almost all great investors. It makes sense if you think about it: emotional people tend to buy when prices are high and sell at the bottom. Many successful investors practice contrarianism. It involves doing the contrary of what everybody else is doing at the extremes.
What makes people emotional? Greed and fear. During market crashes logic tries to make you participate in the unique opportunity, but the emotions cause people to make bad decisions. This is the reason we should practice self-discipline.
But no one is perfect, and the following rules are going to help you.
– Be a scale-up buyer
– Have actionable goals
– Decisions made under the influence of emotions make the investment process pointless
– Follow trends – the most part of your portfolio performance is mainly influenced by the long-term trends, so don’t worry too much about the short-term fluctuations
– Don’t turn a “trading opportunity” into a long-term investment – think about your goals concerning a particular stock
– Always be disciplined
– Losing money is an integral part of the investment process, so don’t invest money you aren’t prepared to loose
– You are more likely to score a good deal when the fundamental analysis is backed up by the technical price action
– Adding to a losing position is a bad idea
– The market can be “bearish” or “bullish”. In a bull market, you should be neutral or act considering long-term goals. In a bear market, you can also be neutral or take into account short-term trends
– If the market is trading at extremes, do the opposite of what everyone else is doing
– Consider rebalancing, when the money is taken away from winners and added to losers. You should only give your money to winners
– Pay attention to “Buy” and “Sell” signals. If you’re trying to get by without a “buy/sell” discipline, you’re bound to fail
– There are no perfect strategies. Just be consistent and learn from your mistakes
– Look closely at risk and volatility: analyze what leads to mistakes and try to use this information to generate profit
The long-term bullish trend which started back in 2009 is still here. The 2020 crash seems to have been reversed by the extreme monetary interventions of the Central Bank. It looks like in order to keep the bull trend intact we’ll need more and more interventions.
If these measures fail, it will be a signal of the start of the next bear market cycle.
It’s very difficult to predict what is going to happen next. But we should all remember that good things come to an end just like everything else. During disastrous times investors should focus on controlling the risks in the short-term, and try to stay away from major draw-downs.