Monday, December 29, 2008

You Must Develop An Overall Strategy With Guidelines You Stick To

Retail traders are notorious for jumping into the market head first as they focus all their attention on finding and buying stocks.

What they fail to do is properly educate themselves and learn to build a strategy.
Investing is no different than any other part of life. Sure, it’s clichéd, but if you fail to plan, you plan to fail. A few years ago, the US basketball team was comprised of professional basketball players whose combined talent had never been matched. They subsequently went into the Olympics and lost to teams with inferior talent.
Why? The planning was poor, and the pieces didn’t work right together. You may pick great stocks, but without proper entry points, exits, stop-losses and consistent position sizing those great stocks may yield a loss.

Part of educating yourself is learning what you need to know and building rules for an overall portfolio strategy that you stick to. Inside that overall strategy you may have allocations which require their own unique rules for more conservative or more aggressive trading strategies, and that’s a fine diversification model. And you may even have to modify your rules over time. But consistency is key and lack of it is catastrophic to a portfolio.

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