Tips for Long Term Trading
Every investor has the ultimate goal of having long-term success in their ventures.
Over the years, investors and parties with vested interests in the market have identified some tips that are sure to give a better edge to anyone that’s looking for long-term success in trading.
Let’s consider some of these tips:
One sure thing about trading and investments is that there is always a risk. The only variation could be the type and degree of risk. Therefore, it comes as a necessity for all investors to minimize all risks associated with a certain form of investment.
Diversification is one of the popular ways in which investors safeguard their investments against risk. Often, they invest in a variety of stocks which could also be from different markets. Aside from stocks, they could also add mutual funds and bonds to their portfolio. Other investors choose property markets, hedge funds and also commodities as avenues for diversification.
Generally, investors who diversify set a threshold for each investment such that each should not be above 10% of the total portfolio. The premise behind diversification is that the gains realized in one investment offset the losses in another. Thus, it serves as a means to counter the risk of losing your investment capital.
Have a Strategy
Strategy is the means by which a desired end can be achieved. Long term trading also requires a strategy, specifically an individual strategy. Various people have different trading methods and strategies, all in a bid to realize a certain trading outcome.
But, as an individual investor, you ought to have your own trading strategy that you stick to at all times. It’s not advisable to juggle between trading styles and strategies as the outcome could be outrageous.
Switching between strategies makes you a market timer, which will bring more loss than gain in your investments. Therefore, identify a single strategy that reflects your individual preferences and goals, then stick with it.
Big time investors such as Warren Buffet (through his value-oriented strategy in the late 90’s) can attest to the value of sticking with one strategy even it is an unpopular one.
Have a Long-Term Horizon
Most investors are usually attracted by short-term ventures which have huge returns. However, adopting a long-term view of investments is what will create sustainable wealth for you.
Yes, short term trades are not bad in themselves, but if you look keenly, they eat up much of your funds in the name of commissions. Therefore, resist the urge to trade frequently. Instead, focus on long-term investments.
Always Endeavor To Minimize Total Tax Payable
Well, two things that are for sure in this world are death and taxes. Yes, taxes can eat up your investment proceeds if you are not careful.
This is not an argument to support tax evasion, but a reminder to always check for tax benefits. Always be on your toes looking for ways you can minimize the total tax payable in order to have an after-tax return that you can smile about.
Don’t Always Rely On the Price-Earnings Ratio
Many investors over-rely on the price-earnings ratio. In fact, they solely use this ratio as the determinant of a buy or sell decision. Well, there are many other tools out there that are key in making such decisions and are used in conjunction with the price-earnings ratio.
Thus, using it alone could spell doom as it might not accurately determine the correct position of a company. A low price-earnings ratio or a high one does not necessarily imply that a company is undervalued or overvalued respectively. Other analytical tools have to be employed too.
Avoid Trading the Market Noise
Another pitfall that most investors plunge themselves into is making a trade decision based on what others are doing and also the popular opinion.
No matter how well-meaning it may sound, always stick to your guns. Always make a trade based on reason backed by thorough analysis and research.
Yes, sometimes you might be on a luck streak, and the market noise could be in your favor, but the converse could also happen. The premise here is being an informed investor.