One thing that I have learned about trading and investing many more times than I should have over the last thirty years is that there needs to be a reason to trade or to invest, there should be a specific point to it or a specific goal.
Making a trade for the sake of trading is not a good enough reason to trade. What makes you want to enter the market at a particular time in a particular stock? If there is no identifiable reason it is probably better to leave your money in cash until there is a more clearly defined purpose behind it. Reasons for trading often times come from the basic financial goal setting process that hopefully we all are doing annually and monitoring regularly. More generic goals may include simply to increase ones personal wealth or net worth, retirement, making a major purchase affordable or to provide a college education for a child. Once you have determined your financial goals you can then determine what action needs to be taken to reach them in an amount of time that is consistent with reaching the goal.
There is a wide array of financial products that you can use to achieve your financial goals so first identifying the goals and then mapping your course of how to achieve them is essential. The old adage “If you do not have a specific goal you will always achieve it” is very true when it comes to creating and building wealth. Once you have defined financial goals you then need to determine what financial vehicle is the most appropriate one to get you there. This may in some cases come down to the specific type of financial assets you are building because there can be restrictions around this. If you are saving and building retirement dollars in a company sponsored retirement account such as a 401k plan the company will dictate what investments are available so of course you will need to make the best choice from the options available. The IRS will also set guidelines for what IRA accounts can and cannot be invested in so you need to be able to work within the parameters that are set for you.
When building an account that consists of regular dollars, after tax dollars, there are far fewer restrictions so you really do have a very wide range of opportunities however in most cases there almost has to be some type of stock trading that is done in at least a part of the portfolio. The reason of course is that there is a far greater opportunity to make consistent above average returns while trading in individual stocks than there is in most other opportunities.
Generally speaking the return on cash instruments is clearly defined by the bank or financial institution that is offering it but interest rates have been very low for many years so this really isn’t a viable opportunity. Banks are great for exactly what their purpose is which is to hold on to small amounts of short term cash. When we deposit money into a bank they are taking the money in one window and giving us a stated rate of return and then they loan it back out charging many more times than what they are paying us for it. This is an excellent system that has worked well for them for many years but this system will typically not help us achieve our financial goals. The only good news about having money in banks over the last several years is that inflation has been low as well so we have not really lost any purchasing power. Money deposited in bank instruments is generally thought of as lazy dollars because they are not doing much for us. Based on what has happened in the banking industry since approximately 2008 we really can’t even get excited about our banking deposits being guaranteed. There have been record numbers of bank failures which obviously puts our “guaranteed” or “safe” money in jeopardy. Money in banks is generally only a good investment if you own the stock of the bank becoming part owner of it rather than being a depositor and being a low interest rate loaner to it.
Mutual funds are another possibility, they are financial vehicles that are commonly used to invest longer term dollars whether the account is a retirement account or a regular account but they have had severe drawbacks over the last 10 or 12 years. Mutual fund companies will pool investor dollars together and use the money to purchase securities in particular types of investments such as stocks, bonds or municipal securities providing capital growth or cash flow to the investors. One of the main purposes of a mutual fund is to give the average investor a place to park money for the long term while hopefully adding to it over time and achieving a decent positive rate return. The thinking of course is that what is called a “buy and hold” strategy will work over a long period of time because growth mutual funds are invested in the stock market which of course always goes up over a long period of time. This is where things have changed over the last 12 years. The “buy and hold” strategy has actually turned into the “buy and hope” strategy because the stock market, represented by the Dow Industrial 30, stopped going up in the first half of 1999 and has largely gone sideways since then. It has drifted up and it has drifted down having many runs in each direction but it has not had the steady upward trajectory that it had for the seventy years before that time that made the “buy and hold” strategy work.
The investment world has grown tremendously in the past decade or so. From an investment standpoint we not only need to be concerned with economic conditions in our own country we also need to be concerned with economic conditions in Europe, Asia, North America, South America and all parts of the world because all of our economies are very integrated. What happens in one area of the world can and often time’s does effect what happens in other parts of the world and there can be a global effect from certain events. Information is disseminated so quickly today that the markets react almost immediately. This of course can be looked at as good or bad but the bottom line is that the world had changed in this regard and it is not likely to return to how it was in the past.
If for no other reason than the speed at which information moves today today’s investor must be very nimble and agile and must be able to react quickly to any number of a wide variety of events. This may actually sound a little overwhelming and time consuming but it is actually very achievable for the average investor. Once you have mapped out your broad financial goals you will likely see that they may be almost impossible to achieve without trading individual stocks in at least part of the portfolio because that is where you are likely to see your most profitable investments. To achieve this you will need to be educated on how to accomplish this and you will also need a good solid trading strategy to get you there but the sad truth is that if you don’t do it there most likely isn’t anyone else that will. Even if you do have a financial professional assisting you there is a good chance that they are uneducated in this area and will be of little help to you. The more time you have between now and when your financial goal must be realized the more time you have to tolerate lazy dollars and advice that is unlikely to help you reach your goals but as your time decreases over the years your efficiency and therefore your return on your investments must improve by increasing dramatically.