9 Ways to “Beat” the Stock Market
September 7, 2011
One of the truths about the stock market is that it’s extremely difficult to beat consistently. What makes it even harder is that often we let the stock market beat us mentally and make us act in irrational ways. Rather than thinking about beating the return on the stock market, you need to learn how to make the most of your investing plan. Here are 9 ways to help you stay on top of the stock market:
1. Reduce the Emotion Involved in Investing
One of the worst things you can do is let emotion rule your investing too much. While you can’t get rid of emotion entirely, you can control it so that you don’t make as many mistakes. Don’t get caught up in euphoria and buy when the price is high, and certainly don’t let blind panic induce you to sell just because the price is lower – read the book “Why Smart People Make Big Money Mistakes”.
2. Consider the Fundamentals
Part of reducing the emotion involved with investing is considering the fundamentals. Before you buy, consider the strength of the company, and find out more about the “big picture” items that can influence long term strength for the investment, such as management, profit margins and industry growth. If nothing has changed in your fundamental analysis, and a price drop is due to a general market decline, selling based on panic could cost you in the long run.
3. Appropriate Diversification
In order to help protect your investment portfolio from drops in one sector, some diversification is important. Figure out a good asset allocation, and figure out how you can limit your exposure to one sector. Make sure all of your eggs aren’t in one basket.
4. Watch Out for High Fees
Investment fees can erode your returns over time. When you pay fees, it cuts into what’s available to invest, as well as how much you end up with. Look for brokers with low fees so that you keep more of your money.
5. Don’t Confuse a Broker with a Financial Advisor
You need to be aware when getting investment advice from a broker that they don’t have a fiduciary duty to you as an investor. This means that he or she does not have to look out for your best interest first. A financial advisor, on the other hand, is required by law to look out for your best financial interest.
6. Avoid Over-Reacting to Big Market Movements
Sometimes, in the short term, we see big drops or big gains. In the short term, the stock market is volatile, but over the long term a lot of the volatility has historically evened out to an overall upward trend. Before you buy or sell based on a big market movement, take a step back and think about your reasoning. A measured response to short term volatility is important. – Again, read the book “Why Smart People Make Big Money Mistakes”.
7. Understand What You’re Buying
Before you buy a stock, you should undertand it. What does the company do? How does it make money? Why do you want to purchase the stock? Find out about what you are buying, and make sure you understand the industry so that you can evaluate the stock on its merits.
8. Avoid Buying Based on Hype or “Hot Tips”
Watch out for investments that have a lot of hype. Also beware of “insider” tips from friends and family. Realize that often hype is used to generate interest in an investment. You don’t want to buy in during the “dump” phase of a pump and dump. Do your own research and don’t rely only on what others are saying.
9. Don’t Be Too Risk Averse
While you do want to protect against excessive risk, you do have to realize that some risk is necessary if you want to make money. Only by taking on some risk will you be able to realize adequate gains for your investing goals over the long term.
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