Some Rules Of Investing, Which You Should Break
Posted By tsauthor on February 24, 2011
Trust yourself
Approximately 80% of investors say that their results are above average. Psychologists, behaviorists call this phenomenon “a tendency to optimism”. Unfortunately, most investors who believe that they managed to beat the market, in fact, achieve profitability, which is 5-15 percentage points behind the profitability of the S & P 500. Optimism in the style of “macho” may be working during the negotiations, but it is absolutely irrational at the stock market.
Choosing the right moment to carry out market operations allows us to obtain results above average.
In fact, everything is opposite. By some estimates, the active trading reduces revenues by about one third. Transaction costs, commissions and taxes eat up a significant portion of the profits. Therefore, experts advise investors who do not have much experience, to remain faithful to the strategy of indexing. As said financial advisers, that the best thing that could make the investor – is to buy a paper and a good company to keep them. Trading operations carried out frequently and in large volumes – is not something that can bring you a lot of money”.
Higher risk brings higher income
Wall Street experts have always talked about the existence of a direct relationship between risk and return. But it’s not quite true. If the portfolio is well diversified, the investor allocates the risks and increases their profits in the long term. However, remember that diversification – not just the presence of the portfolio securities of many funds and stocks. Very often, investors are investing in the fund, because it applies to a limited number of investment objects, which are investing 401 (k), or any magazine included them in its “Best twenty?, or they have heard from your broker about the emergence of a new “hot” fund.
In reality, most portfolios are not diversified as it should, because investors are extremely irrational.
Buy on the “immersion”
During the market downturn of 2000-2002 experts often speculated that the “bottom” is near and it’s time to buy. This is quite irrational. The above mentioned rule can work in a growing market, but at that time investors have lost $ 8 trillion, guided by such recommendations. Those who have exaggeratedly optimistic calls raise serious doubts; forget about buying for “immersion”. Perhaps, until no end to another “bear” market, it is better to sell shares and invest the resulting cash in money market instruments or bonds indexed to inflation. Another option – use the method of investment, involving investments in a particular type of securities a fixed amount at regular intervals, the so-called “dollar-cost average”. This method allows you to purchase a greater number of shares at lower prices and fewer – if it rises.
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