Minimize Your Losses
The
first rule of compounding is the same
one mentioned for trading or investing.
Minimize
your losses!!! We also add to minimize your greed and
fear. Greed or fear
are frequently the reasons for big losses. If you
have a 50% loss, you need a 100%
gain to break even. The average annual return is around 10% a year, or
10
cycles. To break even, it would take 7 years or cycles. That is the
reason it
so important to control your
losses.
Emotional
decisions contribute to big
losses. You need to understand your emotions and control them.
One way to control
your emotions is to
invest in better quality dividend stocks when they are reasonably
valued. These
stocks usually cause far less emotional stress and usually go down less
and come
back faster than other stocks. The stress is less which allows for
better
control of your emotions, fewer losses and more income.
Supply
and demand, like compounding, is another basic concept you should
understand to
become a successful investor.
As supply decreases and/or demand
increases, prices usually go up. As supply increases and/or demand
decreases,
prices usually go down. This is true for most things for sale,
including stocks
and bonds.
Investor behavior
based on FEAR,
GREED and HOPE is a
major contributor to
permanent losses.
Fear may
be the biggest problem for investors. It can cause buying at high prices when chasing a stock (fear
of missing a rally
or what others are in) or selling at the wrong time because of events
that may
have nothing to do with the stock.
Greed
is more of a problem
with selling at the wrong time waiting to get a higher price.
Hope usually
is felt holding a stock for more profits or
less loss. Both can hurt your compounding efforts.
Investors
need to learn to control their
fear and greed levels to take advantage of the opportunities presented
when
others panic because of fear and greed. Buy
when others panic; sell when
others are greedy and hopeful.
| 
