Good morning! Today Troy continues about the investing for beginners series. You can check the previous posts about What are stocks and how to value them, How does Currency Trading Work, How are Currencies Traded, Investing in Commodities, What Fundamentals Affect Commodity Prices, What are ETF’s, What are Options, How are Options’ Prices Structured, Investing for Beginners Part 2 – Different Investment Strategies, When does Buy and Hold not Work, An Unconventional Approach to Buy and Hold
In the last post I discussed the need to create a side business if you decide to buy and hold. However, creating a side business is not enough. We’re still missing a couple of ingredients.
Identify the Trends
Having a steady source of cash to snap up stocks on the cheap (when they are cheap, of course) means nothing if what you invest in is wrong (duh). You cannot do what your parents or grandparents did and just blindly invest in the stock market. The fact is, they got lucky. They were probably the luckiest generation of people (Americans in the 20th century, America’s Century), much like the 2nd century Romans (Rome’s Golden Age) or the 8th century Chinese (China’s Golden Age). For many of our parents’ generation, they retired because of sheer dumb luck. They blindly listened to their financial advisors (what else are you supposed to do if you’re too tired after a long day of work?) and invested in America, the Land of Opportunity. Fact is, the market didn’t achieve 7.5% returns annually because “this is America”. It’s because of the unique circumstances that we were in during the 20th century (America’s golden age). The market just so happened to achieve 7.5% returns annualized.
But our generation is different (which we can see from all the practically bankrupt pension funds). We need to invest smarter. We cannot depend on sheer dumb luck. And in order to do that, we need to identify the long term trends. And you know what the beauty of this is? Identifying long term trends is actually pretty easy!
It didn’t take a genius in the 1980s to realize that computers were becoming a big thing. As long as you were relatively smart (no Einsteins here) and you read the news (no NYTimes.com back in the day, unfortunately), you probably knew that computers were taking over the world! In the words of famous investor and hedge fund manager Jim Rogers, “you don’t have to predict the future. You just have to see the money lying on the street, walk over, and pick it up.” In other words, what he’s saying is that you don’t have to predict future trends. All you have to do is recognize trends when they occur.
All these trends will be caused by big fundamental factors. A couple of trends we’re experiencing right now include:
- The long term devaluation of the U.S. Dollar. Thanks to Bernake printing a ton of money (quantitative easing), the US Dollar is in a long term (multi-decade) downhill slope.
- The long term bull market for commodities. Massive demand from China and emerging economies will mean a huge increase in demand for raw materials.
Have an Exit Strategy
Of all the investment books that I’ve bought (and believe me, that’s a lot), there’s only one book that I’ve found to really be useful: When to Sell Stocks (and no, I’m in no way affiliated with this author). Why is this book so friggin awesome? Because every single investment book out there only tells you when to buy and how to buy stocks. Not a single book (besides this one) tells you how to sell and turn your paper profits into real profits!
Selling isn’t as easy as hitting the “Sell” button on your keyboard (if that actually existed). You need an exit strategy:
- What price will I sell at?
- Will I liquidate my entire portfolio all at once, or will I liquidate a portion at a time?
- Will I liquidate on the way up during a bubble, or will I liquidate my entire portfolio in a post-bubble rally?
These are all very important questions that you must answer before you decide to buy and hold for 40 years. Most buy and holders just say “I’ll figure it out in 40 years.” That’s totally wrong – you need to plan ahead.
Unfortunately, I cannot tell you what your exit strategy is going to be. That is totally dependent on your unique circumstances.
You raise a good point that it might be worth thinking about when and under what conditions you plan on selling a stock. I do think that most investing books focus on when to buy a stock because it can be hard to project when to sell a stock. Setting a generic number of when to sell isn’t the best idea imo because businesses are constantly changing, as well as the business/regulatory environment in which they operate.
DC @ Young Adult Money recently posted…5 Steps to Plan for Major Life Events
Interesting concept about perfecting the art of when to sell stocks. I will have to check out this book you recommend.
Derek at MoneyAhoy recently posted…Investment Tips – Know Your Risk Tolerance
If you have a total market fund, like the S&P, Figure out how much to sell in the beginning of the year, and sell it throughout the year.
No Nonsense Landlord recently posted…How to Find a Mentor for Financial Advice (or Not)
Great advice! I learned the hard way a few times over that the trend is your friend and that you always need an exit strategy – this is regardless of if something is going up, or down.
Glen @ How To Save Money recently posted…Making Extra Mortgage Payments
Developing an overall investing strategy and an exit strategy is highly important for retirement savings. It always gives me a shock when I hear someone mention they have an IRA invested in “Fidelity”. So many people don’t even know what they are invested in, much less how and when they are going to adjust those investments, both before and after hitting retirement.
John C @ Action Economics recently posted…Reflections On My First Decade As an Adult
Good point about needing to identify your exit strategy very early on. Statistics prove most people sell when prices go down — the very time that’s best to buy…
William/Bite the Bullet Investing recently posted…How To Build Your Own Stock Portfolio, Part 2
I agree. We should really have to identify first our exit strategy to be able to differentiate of going up and down. By that strategy, you can prevent yourself from moving down.
Identifying trends is as important when trying to figure out a long term investment. Often, with regard to tech, this is impossible as trends change almost on a monthly basis. However, some themes/trends seem to be taking shape and are easier to identify such as seeing the boomer generation retiring and getting older… healthcare trends come to mind. Whether it’s investing in pharma companies, medical devices, or healthcare REITs, one thing is for sure, the medical establishment will be growing exponentially as the boomers age.
DivHut recently posted…My String Cheese Just Got Downsized
Interesting post. I took a business finance class in college, and the first month or so focused on personal finance (the stock market, etc). It was an interesting class, but one thing I remember my instructor saying over and over again is how important it is to have an exit strategy.
Daisy @ Prairie Eco Thrifter recently posted…What Money Advice Would You Give Yourself If You Could Go Back in Time
I just invest in index and hold for the long term. I don’t worry about what is happening in the market on a daily basis. So far, I’m doing great. When I need to sell – because I need the money for one reason or another, I will just sell.
Jon @ Money Smart Guides recently posted…My Dumbest Money Move Ever
Wow, wonderful blog layout! How long have you been blogging for?
you made blogging look easy. The overall look of your site is
wonderful, as well as the content!
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