When I meet or correspond with Oxford Club readers who are fairly new to investing, a common theme arises: They beat themselves up over mistakes they’ve made.
I explain to them that we’ve all paid “tuition” for learning how to invest, including me. But I’m not talking about investing classes. I mean taking losses because I didn’t know what I was doing.
Lord knows I’ve paid enough “tuition” for a doctorate from The School of Hard Knocks – without the benefit of a scholarship or grants.
The good news is that my costly mistakes have taught me well. Today, I’m a better investor than I ever could have imagined when I first started 30 years ago – and I can help you avoid making some of the same mistakes I made.
Lesson No. 1: Use a trailing stop.
Not using trailing stops was one of my biggest “tuition” bills – and one that I paid over and over again.
A trailing stop prevents a small loss from becoming a big one and protects your profits if a winning investment turns against you.
There have been countless times that I gave up hard-earned gains and watched them become losses because I didn’t set a stop. Even worse, I allowed manageable losses to turn into gaping holes that hemorrhaged money… all because I was sure I was right about what a great stock I had bought.
The Oxford Club generally recommends a 25% trailing stop, but with more active trades, I typically will start to tighten the stop as the stock rises to protect my gains.
(To learn more about trailing stops, go here.)
Lesson No. 2: Don’t invest more than you can afford to lose.
There are few feelings more sickening than realizing you’ve lost more money than you can afford to lose.
If you can only afford to lose $1,000 in a stock and you’re using a 25% trailing stop, you shouldn’t buy more than $4,000 worth of shares.
On the other hand, if you’re trading options (which are too volatile for stops), you should assume that if the trade goes bad, you’ll lose 100% of your capital. That usually won’t happen, but it is a possibility, so you’ll want to manage your risk accordingly.
In other words, if your maximum acceptable loss is $1,000, don’t buy more than $1,000 worth of options.
This strategy isn’t just beneficial for protecting your downside. It allows you to take big swings as well.
I’ve had various investments throughout my life – including stocks, options, and real estate – where my bet was small enough that it wouldn’t have a significant consequence, but if it did well, it would still move the needle in my portfolio.
Lesson No. 3: Understand your investments.
Not understanding what you’re investing in causes stress. If you’re new to investing – or to a specific type of investing, such as options – take the time to learn the ins and outs. You don’t have to be an expert, but you should understand what makes the investment go up or down.
Fortunately, there are many online resources – both free and paid – that can teach you about every area of investing. For example, The Oxford Club has some great materials on bond and option investing for Members. YouTube also has tons of videos on nearly every investing subject (although you need to be careful who you listen to, as more than a few of these videos were created by hipster doofuses who think they know what they’re doing because they were fortunate to start trading during a bull market).
Take the time to learn what you need to. There’s always an opportunity to make money in some market. You don’t need to rush into something you don’t quite understand yet.
Lesson No. 4: Manage your stress.
These four lessons are all geared toward helping you manage your stress when it comes to investing. An investor who has invested too much, is suffering a big loss, or doesn’t understand what they’ve invested in will be very stressed out, which will lead to bigger and costlier mistakes.
Your investments should never cause you to lose sleep. Now, that doesn’t mean you’ll be confident every time. I’ve had plenty of investments that I knew were high-risk. But I was comfortable with that risk because I knew that if my investment didn’t work out, my loss would be manageable. Again, small bets allow you to take big swings.
If any aspect of investing is causing you stress, stop immediately. It will save you money – as stress causes people to make mistakes because they’re not thinking clearly – and it will give you greater peace of mind.
Enjoy the Ride
For many people, investing is fun. It definitely is for me. When I see how much dividend income my portfolio generates these days, it makes me think of how far I’ve come. Though it was a long time ago, it seems like just yesterday when I was living in a shabby basement apartment, trying to figure it all out and losing money on a regular basis.
Enjoy the learning process. There’s nothing like feeling empowered because you have a better understanding of how investing works. It doesn’t happen overnight, so take your time and enjoy the ride.
I’ve already paid the “tuition.” Now you don’t have to.
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