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Action Plan

It can be disturbing when people all around you seem to be losing their heads, frantically reacting to developments that seem trivial at best and misleading at worst. Moreover, even a cool and calm perspective can give way to confusion in an environment where emotions are running high and the prospect of economic or geopolitical disruption is dangerously real. Nonetheless, it is usually better to stand back from the turmoil than to be sucked into a frenzy of emotional decision-making. Sometimes those who are caught up in the speculative whirl believe they have matters fully under control. Often, however, what they are experiencing is a fleeting moment of calm at the eye of a passing hurricane. Inevitably, the high winds and chaos reappear, and they are once again stung by the destructive turbulence. While the urge to act quickly can be overwhelming, especially when everyone else is jumping on board, experience suggests it is usually better to keep your wits about you—to ask questions first and keep your powder dry.

Of course, that is sometimes easier said than done. Throughout the ages, markets have almost always had a way of unleashing irrational urges and bringing out the worst in people. Perhaps it comes down to the fact that it is all about money, a subject that has always had an interesting and pronounced affect on psychology and perceptions. Alternatively, it is possible that the wheeling-and-dealing environment gives people some of the pleasures they cannot find in life’s daily routine, such as the prospect of scoring “the big one” without having to work too hard for it. Whatever the case, experienced operators sometimes find that a spell has been cast over them, too. Many successful old-timers will tell you, in fact, that the dark forces never really go away, and that it takes a lot of hard work and discipline just to keep them in check. Practically speaking, the best solution is to fully explore why you are in the investing game to begin with, and then to formulate a prearranged plan. In other words, know who you are and where you are going.

Consequently, whenever you think about investing, the questions you should be asking yourself are as follows: Why are you doing it? What are your goals? Are you putting money into the market to prepare for retirement, to have a little fun, or to make up for a shortfall in other income? If you do not know the answers, or choose to get involved for the wrong reasons, there is a good chance that you will suffer substantial losses. The next question you should think about is: What happens if things go wrong? In fact, it might even be better to substitute “when” for “if.” One of the biggest problems that unsuccessful investors seem to have is in making the assumption that a particular course of action will be the correct one. Obviously, it is great if that turns out to be the case, but what if it goes the other way? Because of inherent human weaknesses, no one really likes to admit their mistakes, because that is seen as a sign of embarrassing failure. As a result, this tough but necessary question is not really asked often enough.

Sadly, it almost seems, in fact, that many individuals would rather lose all of their money than face up to the prospect of having made a bad call. Ironically, the reality is that there are many long-time operators who manage to achieve investment success in spite of the fact that they get it “wrong” a great deal of the time. That is because they are willing to accept losing trades as a cost of doing business—hence, they are not shaken up when things do actually turn out that way. Once the prospect of making poor choices becomes a tolerable friction, it suddenly gets a whole lot easier to quickly eliminate positions that are not working out. Of course, it does not make sense to focus solely on the negatives. Try asking yourself what will happen if things go right. Do you have a target level in mind? Do you have an order or a reminder in place to ensure that you will take your profits if your selection turns out to be a winner?

There is an old market adage that says if you do not know who you are before you start investing, you will soon find out—the hard way. For many individuals, what can be even more important than formulating an investment plan is figuring out what your needs are, as well as discovering your particular style. For example, are you a bull or a bear? Although it is always best to be open-minded, people invariably have some sort of inherent bias. If you are generally an optimist, take the time to temper your enthusiasm with opposing points of view when looking at prospective buying opportunities. Are you a trader or an investor? Are you risk-averse or comfortable with complex and heavily-leveraged instruments? Do you prefer to focus on long-term investing or short-term trading? If you can answer these few questions at the outset, you will save having to ask many more painful questions later on.

Many of those who have found sustained success in the stock market have done so because they have tended to emphasize what they know and what they are good at. Aside from that, if you cannot sleep at night with the positions you have, find some other investments that will allow you to. The “comfort zone” you operate out of should suit you, not someone else. Some people, for example, are not cut out for the short-term trading game because they find it too hard to detach their intellectual views from the basic forces of supply and demand. Moreover, such an approach usually requires a rare ability to alter one’s views without thinking twice about it. Generally speaking, it is best to focus on a limited number of shares or sectors, or to confine your approaches to a select group of strategies. Of course, if performance does really begin to suffer, it clearly makes sense to stand back and reappraise matters, but you should avoid the all too common urge to jump carelessly from one tactic to the next.

Whenever you have exposure to the market, be on the lookout for signs that irrational impulses may be taking over. If you cannot do it yourself, find someone else to help you. For example, if you begin rationalizing or start digging deeply to come up with reasons to stick with a losing investment, that is almost a sure sign that you should be getting out of the position. Moreover, avoid talking about your investments, or even listening to others who would like to tell you about their own interests. The reality is that once a position gets “personalized,” it becomes harder to change one’s views about it. Watch out for signs of denial, too. If you find yourself leaving account statements unopened, avoiding calls from your broker, or glossing over “paper” losses, it is time to cut and run. Finally, if you start altering your particular style—say, by trading more actively or by choosing unfamiliar instruments or complicated strategies—have a look in the mirror. Are you seeing a new “you”—or the old one, running scared?

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