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Lance Roberts - 10 Investment Rules To Live By

One of the wisest things a trader or investor can do is to learn from experiences of the best professionals of the industry. Thus New Ethical Trading is presenting a series of articles with trading or investing tips from the most successful Forex and Stock traders of all the times.

 

 

lance roberts1) You are a speculator - not an investor
Unlike Warren Buffet who takes control of a company and can affect its financial direction - you can only speculate on the future price someone is willing to pay you for the pieces of paper you own today.  Like any professional gambler - the secret to long term success was best sung by Kenny Rogers; "You gotta know when to hold'em...know when to fold'em"

 

2) Asset allocation is the key to winning the "long game"

In today's highly correlated world there is little diversification between equity classes.  Therefore, including other asset classes, like fixed income which provides a return of capital function with an income stream, can reduce portfolio volatility.  Lower volatility portfolios outperforms over the long term by reducing the emotional mistakes caused by large portfolio swings.

 

3) You can't "buy low" if you don't "sell high"
Most investors do fairly well at "buying" but stink at "selling."  The reason is purely emotional driven primarily by "greed" and "fear."  Like pruning and weeding a garden; a solid discipline of regularly taking profits, selling laggards and rebalancing the allocation leads to a healthier portfolio over time.

 

4) No investment discipline works all the time - however, sticking to discipline works always.

Growth, value, international, small cap or bonds all have had times when they topped the charts in terms of return.  However, like everything in life, investment styles cycle.  There are times when growth outperforms value, or international is the place to be, but then it changes.  The problem is that by the time investors realize what is working they are late rotating into it.  This is why the truly great investors stick to their discipline in good times and bad.  Over the long term - sticking to what you know, and understand, will perform better than continually jumping from the "frying pan into the fire."

 

5) Losing capital is destructive.  Missing an opportunity is not.
As any good poker player knows - once you run out of chips you are out of the game.  This is why knowing both "when" and "how much" to bet is critical to winning the game.  The problem for most investors is that they are consistently betting "all in all of the time."as they are afraid of "missing out."  The reality is that opportunities to invest in the market come along as often as taxi cabs in New York city.  However, trying to make up lost capital by not paying attention to the risk is a much more difficult thing to do.

 

6) You most valuable, and irreplaceable commodity, is "time."
Since the turn of the century investors have recovered, theoretically, from two massive bear market corrections.  After 13 years investors are now back to where they were in 2000 if we don't adjust for inflation.  The problem is that the one commodity that has been lost, and can never be recovered, is "time." For investors getting back to even is not an investment strategy.  We are all "savers"that have a limited amount of time within which to save money for our retirement.  If we were 15 years from retirement in 2000 - we are now staring it in the face with no more to show for it than what we had over a decade ago.  Do not discount the value of "time" in your investment strategy.


7) Don't mistake a "cyclical trend" as an "infinite direction"
There is an old Wall Street axiom that says the "trend is your friend."  Investors always tend to extrapolate the current trend into infinity.  In 2007 the markets were expected to continue to grow as investors piled into the market top.  In late 2008 individuals were convinced that the market was going to zero.  Extremes are never the case. 
It is important to remember that the "trend is your friend" as long as you are paying attention to, and respecting, its direction.  Get on the wrong side of the trend and it can become your worst enemy.

 

8) If you think you have it figured out - sell everything.

Individuals go to college to become doctors, lawyers and even circus clowns.  Yet, every day, individuals pile into one of the most complicated games on the planet with their hard earned savings with little, or no, education at all. For most individuals, when the markets are rising, their success breeds confidence.  The longer the market rises; the more individuals attribute their success to their own skill.  The reality is that a rising market covers up the multitude of investment mistakes that individuals make by taking on excessive risk, poor asset selection or weak management skills.  These errors are revealed by the forthcoming correction.

 

9) Being a contrarian is tough, lonely and generally right.

The best investments are generally made when going against the herd.  Selling to the"greedy" and buying from the "fearful" are extremely difficult things to do without a very strong investment discipline, management protocol and intestinal fortitude.  For most investors the reality is that they are inundated by "media chatter" which keeps them from making logical and intelligent investment decisions regarding their money which, unfortunately, leads to bad outcomes. 

 

10) Benchmarking performance only benefits Wall Street
The best thing you can do for your portfolio is to quite benchmarking it against a random market index that has absolutely nothing to do with your goals, risk tolerance or time horizon. 
The only benchmark that matters to you is the annual return that is specifically required to obtain your retirement goal in the future.  If that rate is 4% then trying to obtain 6% more than doubles the risk you have to take to achieve that return.  The end result is that by taking on more risk than is necessary will put your further away from your goal than you intended when something inevitably goes wrong.
It's all in the risk
Robert Rubin, former Secretary of the Treasury, changed the way I thought about risk when he wrote:
"As I think back over the years, I have been guided by four principles for decision making.  First, the only certainty is that there is no certainty.  Second, every decision, as a consequence, is a matter of weighing probabilities.  Third, despite uncertainty we must decide and we must act.  And lastly, we need to judge decisions not only on the results, but on how they were made.
Most people are in denial about uncertainty.  They assume they're lucky, and that the unpredictable can be reliably forecast.  This keeps business brisk for palm readers, psychics, and stockbrokers, but it's a terrible way to deal with uncertainty.  If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each.  Then, on that basis, you can make a good decision."
It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin's approach goes beyond that.  For starters, although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.  Another benefit of "acknowledged uncertainty" is it keeps you honest.  A healthy respect for uncertainty, and a focus on probability, drives you never to be satisfied with your conclusions.  It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.

The reality is that we can't control outcomes; the most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time.

 

 

We wish you happy and safe trading, keep reading more interesting articles on www.newethicaltrading.com 

New Ethical Trading
       
   


 

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