There are many different principles that can be applied to investing but with so many different pieces of sometimes conflicting advice, it is often better to drill down and focus on just three key areas that hold true for any successful investor.
Stick with the Winners
Many investors have a somewhat illogical approach to their portfolio as there is a tendency to sell the stocks that are doing and hold on to shares that are performing badly in the hope that the stock will rebound. Just because a stock has doubled or tripled in value there is no guarantee that it will continue to do so, however, checking the fundamentals and why its value is increasing, should give a strong indicator of its long-term potential. Often people have a “sell point” where a stock’s value has gained a certain percentage. This narrow minded approach can limit achieving the full profit potential of a stock. Likewise with losing stocks, it can be hard to admit a mistake and hold on to it out sheer stubbornness even when research shows it has very little value.
Ignore Short Term Market Effects
Assuming that most people do their research before purchasing a stock rather than just randomly picking them, there is no need to start sweating when the stock moves downwards over a week or two. The market is volatile and the share price is affected by institutional proprietary traders and other types of investors who often have very short term goals. Having confidence in an investment choice and riding out short term volatility is often the key to long term gains.
Investors as a whole tend to have s strategy that is designed to make money and also fulfill their investment goals. Even if this strategy is not working in the short term, provided it has been well thought out there is no need to suddenly ditch it, especially if the time horizon for the strategy is longer than its current, lower than expected, performance. Switching strategies as the market changes will often result in greater losses as investors get sucked into the latest trend rather than focusing on their own goals.
This is not a guaranteed plan for investment success, but by keeping these three principles at the forefront, the long term benefit should be evident over time.