How is your online stock broker account doing? Are you meeting your stock investing goals?
I have a new goal for my stock portfolio. I’ve decided that on my road to financial freedom, if I can double my portfolio every 6 months I can retire before the age of 50. Sounds like a great idea doesn’t it? Of course, but is it feasible? One of the ideas behind goal based investing is to figure out how possible it is.
I read an article that said: discipline is the most important factor in trading and investing in stocks. It separates those who will be profitable in their activities from those who are “hopes and dreams” traders. I can think of far too many times that a lack of clear cut rules has caused me to sell too early, buy too late, or pick a stock based on flimsy information…and that was just this week.
My Stock Investing Goals and Investment Rules
So what are some goal based investing rules? Note that I’m taking the “active investing” approach, which involves both some market timing and stock picking elements, as opposed to passive investing which is a much simpler investing strategy. The following tips are for those investors who enjoy being closely involved with their investment portfolios. Here’s how to invest “actively”, according to a few rules:
1. Know your stock’s entry and exit points.
When you buy a stock, know when to enter and exit your position. If you believe that a stock has 5% on the upside and the upside is fulfilled in one day, stick with your rules. Don’t get greedy. Sell it.
2. Buy on rumor, sell on the news.
Another rule is the old standard one of buy a rumor and sell the news. Stocks rise on rumors, impending news, and hype. Once the hype is gone, you had better be out of that position. This goes back to knowing why you bought your stock in the first place (e.g. your position may have been based on rumors of a takeover). If the takeover happens or drops out of the news, don’t go back on your rule even if you’ve lost money in the process.
3. Manage your cash situation.
How much cash do you want to have on hand? The last thing you want is to have the trade opportunity of the century to materialize and you don’t have any money to get in. Most active traders or investors are never fully invested, but how much cash should you have available for other, future opportunities?
4. Use trailing stops and limit orders to minimize downside risk.
One of the best strategies that helps me to stick to my rules is to use trailing stops. With a trailing stop, you can say, for example, that you want the stock to be sold if the price drops a certain percent from the highest price of the day. This, of course, limits downside risk and preserves profits. Another strategy I use to keep with my sell levels is to apply limit orders. If I think that a stock has a small upside and I feel confident that “today is the day”, I will often set a limit order. In this case, I set a price for my stock at which it should sell. If my stock hits that price, a sale is triggered; now the price might have more to go (upwards) but doing things this way keeps me from being too greedy and potentially losing out on profits.
Can I Double My Investment Portfolio?
Remember my new found goal of doubling my stock portfolio in 6 months? Is this feasible? Goal based trading has something called the Rule of 72 (it’s a different look at this Rule of 72 that many investors may be familiar with).
Divide your time frame into 72: 72/6 (months) = 12
The result of the Rule of 72 calculation as I’ve applied it above, is the percentage that my portfolio would have to increase each month to hit my goal. Is a 12% gain in my portfolio each month practical? Probably not so; perhaps as a timeframe, using 12 or 18 months is more achievable on the aggressive end — for the most astute, experienced and dedicated investors out there. Remember that the most important rule you set for yourself is to be realistic. If you are like me, with a full time job outside of investing, and you can’t keep tick by tick statistics on your computer screen, then 18 months may still not be practical.
In general, the average length of time to double your investments by simply matching the stock market’s performance is 7.2 years: this is accomplished by having a 10% annual rate of return.
So before you make any more moves, take some time to set some goals. Be realistic about how you will reach those goals. Have fun investing! Remember that burning yourself out is far worse than making a couple of bad trades.