Investing without anxiety
Many investors undergo a lot of anxiety and stress in chasing returns from stock investing. History does not necessarily repeat itself and the stock that has given you spectacular returns in the past is often less likely to do so again when compared to other stocks in the same category. Rather than stressing yourself unnecessarily trying to anticipate the whims of the financial markets, you would be far more relaxed and better off if you rely on academic methods that have proved themselves over time. Once you have set up an investment plan that is high-quality and based on knowledge, you can sit back and watch your portfolio grow…
When you are planting a garden, one of the major prerequisites is the availability of good soil. Without good soil, your efforts are unlikely to succeed in growing good plants. Similarly, in stock investing, your strategy is the soil from which you can reap good returns. Continuing the garden analogy, you can expect both good weather (bull markets) and bad weather (bear markets) and both are necessary to create the market volatility that gives you the trading opportunities. In fact, if you are well prepared, you can profit from any kind of market conditions.
The best way to create fertile soil for your investment garden is to rely on academic research. The advantage of academic research is that it is subject to a stringent review process where the objective is to ensure truth and the depth of knowledge. Because the motive is not profit, you can find objective and neutral information which is what you need to make your investment decisions. If you can distil this knowledge into a few key points that are relevant to your investment style, you can easily put the knowledge into practice.
For instance, you should have a clear understanding of the relationship between risk and reward and the fact that higher returns entail investment in higher risk stocks. For anxiety free investing, make sure that the risk that you take is in line with your own personal tolerance and appetite for risk. There is no point in making investments that you are not comfortable with and then suffering through sleepless nights. Similarly, you can add to your comfort level if you understand the theory of portfolio investment. In short, you do not put all your eggs in one basket or investing too much of your money in a single stock. If you can control stock specific risk, you then only need to worry about market risk.
You can achieve this portfolio diversification quite easily by hedging your stock investment with the appropriate index or inverse ETF. Eventually, what will determine the size of your investment in a particular stock will be the trade-off between greed and fear? For instance, if you greed is greater than you fear, you will probably be tempted to undertake some margin investing. Leverage is a double-edged sword but, properly used, you can multiply your returns. If your fears outweigh your greed factor, choose investments with a lower degree of risk such as ETF’s that provide you with automatic diversification. However, in keeping with the risk/reward principle, limiting your risk automatically limits your return.