“An investment in knowledge pays the best interest,” once quipped US founding father, Benjamin Franklin. While the advice of long-dead polymaths can usually be disregarded in the context of modern investment, this maxim has stood the test of time.
The primary reason an investment might fail is a lack of understanding. The democratisation of financial markets – plucked from the City and Wall Street and placed into the pockets of anyone who wants a slice of the pie – is undoubtedly a good thing. But with it has come a rise in investors who buy into a company or commodity without first contemplating why they are doing so.
We’ve all heard ‘bloke down the pub’ share tips; his mate works in oil and reckons some unknown small cap will pop next quarter. No doubt sometimes that pays off, especially if you drink in the Square Mile. But that is not a sustainable stock-picking strategy.
What follows are Fineco’s three top tips for strategising your investments to get the most out of your portfolio.
Always have a plan
Even if your plan is to buy when it’s sunny and sell when it’s raining, it is still a plan. A plan will keep you on track and help to avoid random decisions. Set rules for yourself and don’t veer too far away from them. If you spot an investment opportunity, consider what you want from it.
For example, if you want to make a 20 per cent return on a stock, ensure you cash out when you get there. Greed can cause an investor to ride an uptick beyond what they had planned, only for the bubble to collapse, and your gains with it. Better to cash out and reinvest a slice of the profit, hedging your gains against future losses.
Blinded by emotion
The notion that most professional traders are emotionless is certainly far from true, but it does pay to detach yourself from your trades. Your mental state has a significant impact on your decision-making. Keeping a calm demeanor is important for consistent trading, but it’s easier said than done. If, for example, you’re chasing concurrent losses, the likelihood you’ll make brash or irrational decisions, like doubling down to recoup them, increases.
The best made plans can fail, and the more sure of your convictions you are, the harder it is to see them turn sour. You’ll have good days and bad, but setting up stop losses, taking a walk between trades, or even keeping a trading journal can help you to maintain composure when the tide is against you. If you’re having a bad day, take it off – the market will still be there tomorrow.
Know your ratios
Trading is like running a business. When you run a business you sometimes need to take a risk in order to get a reward. You must speculate to accumulate, as the old line goes. Think about your risk/reward ratio – it should be at least three to one. Winning trades must be enough to cover losses and leave some room for a profit.
This is best achieved through maintaining a diverse portfolio, usually made up of safer stocks and bonds, balanced against riskier investments. If your riskier investments don’t pay off, you can sleep safe in the knowledge you’ve hedged against that outcome. Putting all your eggs in one basket, perhaps because of a chap in a bar, is a mistake sadly more common than not.
When you set up an account with Fineco, you don’t just get access to global markets in local currencies with industry-leading rates. You also get access to our ongoing webinar series for advanced traders, covering all the basics alongside trading tips from some of the UK’s top investors. Unlike some of our competitors, we actually want our clients to get the returns they seek: your success is our success.
Find out more: https://finecobank.co.uk/public/