1. Only invest with money that is not and will not be destined for basic living expenses. Even if the money is needed only several months down the line do not even think of using it for an investment. The reason for this is that if you do invest that money, subsequent decisions on the investment will be shaped by basic living expense needs, which strictly speaking is not a factor pertinent to the investment.
For example, Lets say you need that money in 3 months to pay a mortgage repayment. Your investment may temporarily drop on the very week you need the money. In this situation, the correct decision, based on your strategy, could be to hold for another week. But because you have the mortgage, you make the decision to close the investment. This decision was made on information which was irrelevant to the investment and ended up ruining the trade and causing a loss. This issue would never exist if you only invested money you didn’t need.
2. A very effective and clever technique in making investments is to imagine to yourself that the money has been lost completely upon investment. The rationale here is also somewhat simple. Many if not most investments will suffer at one point or another and countless investors (including this one) get cold feet too soon in the game and end up pulling out. Often then the investment turns around into a gain, had the investment been given the time to mature.
Thus, by convincing yourself the money is lost once you invest it, you effectively spare yourself the nervousness many investors suffer doing this lapse of time. Take it from someone who knows: nothing is more frustrating than closing an investment early at a loss, only to watch the same investment for others pull a 180 and make them loads of money…if only!
3. Any and every investor needs to accept that failed trades are a basic fact of life. Everybody will make a certain amount of trades that run into losses. The important part here is the attitude that you adopt in the face of such losses: being a poor, vision-less loser in such events will prevent you from ever becoming a successful investor over the long haul. Following are two exemplary ways to contemplate an unsuccessful trade.
3a). Don’t look at trades individually, rather look at your trades as a group object. For example, you may have a strategy that works four out of five trades. One out of five trades on average makes a loss. What you need to do is tally your net profit over all five trades, including the loss, and divide this by five. The result is your profit per trade. If you do this, you can actually view your losing trades as profit earners. IE. You attribute 20% of your five trade net result to the unsuccessful trade, simply because it is a crucial part of a successful strategy.
This way you will be encouraged to continue trading your successful strategy, rather than get discouraged when one trade goes wrong.
3b). View your losses as education expenses. Most professionals in the finance industries have spent years and tens of thousands of dollars in universities and educational facilities, learning to ply their trade. Unsuccessful trades are a professional investors “university”. To do this properly you have to make sure you analyze these trades and learn from them. Do this in a professional and unemotional manner, otherwise you may fail to make the grade, which will mean you miss out on making long term money through investing.
The investment markets, any of them, can bring out the best and worst of your emotions. It is ultra important to get these under control so they don’t impact your investment decisions. Remember, Plan the trade, and trade the plan.
Damian Papworth makes investments for his lifestyle and his family. Not too long ago he investigated baby high chairs. He created a website with his analysis on high chairs for babies.
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