During my years as a financial advisor, I dealt with a lot of high net worth investors. Their investment behavior was often rigid and structured. The younger investors tended to take on more risk, thinking they needed to make up for their lack of net worth, ironically.
Running a finance site and financial software platform, I interact with a lot of self-directed investors, many of whom are smart and talented, but often lack structure. Without a skeleton, or a foundation, the exterior is nothing but a facade.
Remember, your number 1, 2, 3, 4, 5 things to avoid is blowing up. Draw downs are the enemy. You should avoid them with all of your might, push back against the current of greed that ensnares you into honeycombs of death, and stop worrying about becoming a rich man/woman this year.
For the sake of brevity, I’m going to rattle of my top 10 rules for traders, more specifically geared towards people who are trying to create a net worth than preserve one.
1. Stop trading on margin.
2. Stop using aggressive option strategies. Matter of fact, stop using options altogether.
3. Stop trading futures.
4. Don’t allocate more than 15% on any single stock idea, and try to start as low as 5%.
5. Be sure to trim your big winner when it becomes more than 15% of your account.
6. Never trade on rumors or inside info.
7. Avoid averaging down.
8. Diversify your investments across the 8 principle sectors.
9. Stop being a contrarian.
10. Never let a loss exceed 10%. Sell it and move on. Sell losers fast, all the time. Zero mercy.
I could probably add another 20 to that list, but I’m fairly confident that I nailed the essence of danger for most investors, which ultimately, when reduced to a singular motive, is greed.
We’re in a very bull’d up market. I hate to hear your stories of mishap and ruin during such ebullient times. This might come across as corny, but I’m here to help. If you need some help, an objective point of view — you can email me at any time and I’ll offer you my two cents.