When I have a bit of time on my hands, I like to trade over short periods of time. Usually I stick to gold and currencies, which I feel more comfortable with, but once in a while I’ll trade indexes too. I just try to wait until people freak out about an index being really low, like hitting a 6-month or 12-month low, and buy. You can’t really go wrong with indexes, they always end up going up, the only thing is how long will it take, and if you get scared, or need the money right now, you may exit a losing position. I can afford to wait, so it is not a risky trade if the index goes South for a while.
Anyway, I read that the S&P500 was super low, and people were starting to get worried, so following the “when others cry, you should buy” precept, I went ahead and bought some.
Then later in the day, I had a small profit, and started wondering, like anyone else, if it would still go down some more. So I closed my position, took my profit and called it a day.
Look, it’s here:
I bought on the little blue dot, saw it go up, then as I only had the knowledge of the past prices to the left, thought it may hit another bottom, and sold on the little orange dot, just as the index was starting to go up big time. I had 5 units, so those 20 points made me about $100, which is still better than a loss. Had I kept the trade open, gone on with my day and sold it at the end of the week, I would have had $500 instead. I got emotional, and missed out on the price raise.
If you look at it from the past year, the buy was solid, it was a 6 month low and everything looked good.
Until I became my own worst enemy.
And I am not the only one. There is a study from Fidelity that shows the accounts that best performed where the ones people didn’t touch, because they forgot they even had a trading account! You know that the majority of fund managers underperform compared to indexes. A handful will perform better and everyone will want in, until they stop performing so well, because they took too many risks.
But one of the biggest mistake investors make is selling too soon, and holding to losing positions for too long.
My day trades are just another way to diversify my income streams and I don’t take trading very seriously, but if you are saving for retirement and want a nest egg you can actually count on, do the exact opposite: buy indexes, every month like clockwork, and forget about them until you retire.
Are you your best friend or your worst enemy when it comes to making rational decisions with your investments?
moneystepper says
I used to do stuff like this often, but then I ran the numbers and after trading fees, big/offer spreads and the amount of research I was doing, it simply wasn’t worth my while to beat the market by a couple of percentage points when I worked out my £/hr.
Instead, here at moneystepper we follow a simple formula (which is exactly the same as your suggestion):
MAX – Maximise your tax-free investment funds (Retirement funds & ISA/IRA etc)
TRAX – Buy a diversified range of low-cost market tracking index funds or ETFs
RELAX – Put your feet up for 20-30 years and don’t worry about these investments
The lazy person’s guide to investing which, handily, is also more profitable than 95% of people who work hard at “maximising” their market returns by trying to time the market, trying to pick the next Tesla, etc etc…
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Jayson @ Monster Piggy Bank says
I am buying you idea “Buy indexes, every month like clockwork, and forget about them until you retire”. And, then one day I will just be surprised how much money I have grown. Voila! Easy money!
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MMD says
This is exactly why dollar cost averaging works. By automatically buying shares rather than trying to time the market you take all the psychology out of the equation and buy during those high and low peaks without giving it a second thought.
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How To Save Money says
In the beginning, I passionately checked my portfolio everyday. But then I made a bad decision (-20%)so I became tired of it.. I didn’t look at it for 6 months. ‘Lo and behold after that, my stocks made 5%!
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Brian @ Luke1428 says
I used to trade all the time trying to hit a quick score. I won on a few trades but lost more than I won. That played havoc with my emotions. Now I only look for solid investments that I could hold for 10 years if I wanted to. I’m sleeping much better at night now. 🙂
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Joseph Hogue says
Investors are definitely their own worst enemies. It’s even worse for those of us that work in the market (or used to) and think we know more than we actually do. The market will make fools of us all. A study by research firm DALBAR shows that the regular investor sees returns of about 3% to 4% under the market return from bad investment habits.
Pick companies you know and understand, wait for when everyone else is screaming from prices dropping so much and don’t worry about the investment for a few years.
Joseph Hogue recently posted…Investment Diversification is a Double-edged Sword
Will says
I used to time the market and, of course, I never could. Now I do as you suggest. It’s easier and better. I love it when those two things work together.
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Kayla @ Everything Finance says
I don’t trade with investments. I like to set it and forget it. I have a long time until retirement and I like to just watch my accounts grow over the long run.
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Ian Zafra says
“But one of the biggest mistake investors make is selling too soon, and holding to losing positions for too long.” — this is particularly true and it’s up to you just when you’ll buy or sell. It’ll need thorough research about the past and present trends (better if there is a pattern) to make a decision. Still you can’t trust it 100% but it will help.