09 September 2011
How to Be a Great Investor (Despite Yourself!)

How to Be a Great Investor (Despite Yourself!)

Just call us “predictably irrational.”

Even though we all want to retire as millionaires, we aren’t hardwired to be great investors. Our emotions cause us to buy high and sell low. They cause us to snap up “hot stocks” in companies we know nothing about … and then ride them into the ground.

The way to combat this, some experts say, is by setting up systems to keep our emotions in check. Here’s how:

Understand your emotions. Try this simple risk tolerance exercise to determine how you would react to swings in your investments: Ask yourself what you would do if the value of your portfolio fell 10 percent in one month … and if it fell 25 percent. If your reaction would be to cash out and sell everything, you’re probably not emotionally cut out to handle much volatility. If you’d look at the price decline as a great buying opportunity, you’re probably set to handle more risk, and the accompanying swings in value.

Try some virtual trading. There are a number of websites that offer “virtual trading accounts” that allow you to try different trading strategies without the fear of losing real money. Or, simply create a “watch list” of companies you are interested in. Keep tabs on their stock performance for a period of time before putting your money on the line.

Make the case. Make sure intellect rules over emotions by writing a short note to yourself outlining your reasons for buying a stock (attractive price, potential for growth, strong financials, etc.) before you actually make the purchase. Include what would have to happen for you to consider selling (target price reached, price drops below predetermined level, etc.).

Understand your investments. There’s nothing scarier than an investment you don’t understand. Don’t be tempted by “new and improved” investments or complicated strategies using exchange-traded funds, options or other securities if you’re not comfortable with them. Buy investments that you understand, and that you know will help you reach your financial goals.

Join a community. A community of people who will hold you accountable can be a lifesaver during a moment of high emotions. Instead of making a knee-jerk reaction to buy or sell, run it by a spouse, an investing group or an online discussion group first.

Read up. Michael Burry, regarded as one of the greatest investors in recent history, suggests reading the following four books, which set the foundation for his investment success:

- The Intelligent Investor by Benjamin Graham

- Common Stocks and Uncommon Profits by Philip A. Fisher

- Why Stocks Go Up and Down by William H. Pike

- Buffettology by Mary Buffett and David Clark

Hire an advisor. Finally, if you can’t keep your emotions out of investing, you may need to call in the pros. A professional investment advisor does not get emotional about your money and could be a solid source of advice when the markets inevitably go through rough patches.

 

Although Nevada State Bank is known for its FDIC insured products and services, what you may not know is that your banker or relationship manager can refer you to investment advisory services that can provide you with portfolio advice.  This advice can include help managing assets, implementing tax minimization strategies, developing a wealth transfer plan to assist in protecting wealth, allowing you and your family to live the lifestyle you deserve.

Investment Products are:

  • Not insured by the FDIC
  • Not a deposit or other obligation of, or guaranteed by, the depository institution;
  • Subject to investment risks, including possible loss of the principal amount invested

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