This guest post is brought to you by Tim Parker, a contributing writer at The Digerati Life, a site that covers all topics on personal finance, from reviews on stock brokers to the best credit cards for your needs.
I don’t know about you but sometimes it seems like the stock market is working for everybody except me. I have a friend who is a new investor who says that he has doubled his portfolio in less than a year. Another said that he is thinking of quitting his job soon to cater to his portfolio full time. What are they doing that the rest of us aren’t?
First, let’s have a little reality check. Have you heard of the old fisherman’s adage about always adding 30% to the size of your largest fish? This saying may be applicable here: many people love to exaggerate their returns. My advice is to take what other investors say with a grain of salt because statistics show that they could be having just as much trouble with the stock market as you are.
Aside from that, if you aren’t making the kind of money in the market that you think you should, what are some strategies to do even better?
First, remember that the key to being great at anything is to be a student. If you’re a part time investor, you most likely have another job that pays your bills. How long did it take you to learn to be great at that job? How much reading, learning, listening, and trying did it take before you were making enough money to support your family?
Take those same standards to your stock market research. How many books have you read? How many seminars have you attended? What kinds of contacts have you made in the industry? If your answers to these questions are less than impressive, that may explain why your results are the same. Don’t expect great results by accident. I’ve met far too many people who are using the market as a get rich quick strategy. While it may have some allure, please trust me when I say that the stock market is no place for the uneducated.
Next, you might be trying too hard. You can turn on any of the business channels and listen to people talking about playing the short term trends. Market timing is the way of many traders on TV and because of that, we think that we should do the same. We take the expert advice that we hear, then trade in and out of positions day by day and sometimes hour by hour. But can you really consistently make money this way?
Let’s be clear about something: Those experts are professional traders with inside knowledge and full time experience. They have access to information that the part time investor does not, and more importantly, they often have research teams that help them analyze the results. You aren’t a professional. You need a different strategy.
Your strategy probably needs to be the time proven approach of a diversified portfolio full of medium to long term investments that allow you to capitalize on longer term market trends. If you have a $1,000 dollars and I told you that I was going to roll the dice and you only had a 30% chance of the dice coming up in your favor, would you take this bet? That is, if you had 30% probability of making money and 70% probability of losing most of it, would you take a risk? People take this bet every day by day trading. The chances of you making money by blindly following the pros’ advice is not good.
If you aren’t making money, rethink your strategies. The boring approach often makes much more money in the long run. It may not be as exciting as watching the ticker all day but if the goal is to make money, why not go with what works?
Published or updated May 20, 2011.