Daily Gains Letter

How to Create a Successful Investment Strategy

By for Daily Gains Letter | Feb 5, 2013

DL_Sasha_050213When people ask what the best investment strategy when it comes to buying stocks is, sometimes the most basic concepts are not fully understood. But these are the concepts that should form the foundation for long-term financial success.

One of the most important points when it comes to buying stocks is knowing when to get out of a position. An investment strategy that only looks at one part, buying stocks, and not an exit strategy is setting up a portfolio for failure.

What’s commonly misunderstood is that when a portfolio takes a large loss, it then requires a huge amount of positive returns just to get back to flat.

For some people who have lost a substantial amount of money, their investment strategy turns to taking high-risk and low-probability positions, because they feel the need to quickly make back all of their losses.

That’s a recipe for disaster.

As an example, if you lose 40% of the value in your portfolio, to regain your previous level, you need to have positive returns of more than 66%. This type of return over a short period of time is an unrealistic investment strategy when it comes to buying stocks.

While the public looks at which companies to accumulate, professionals have a more comprehensive investment strategy. Buying stocks without knowing exit points is extremely dangerous. That would be the same as taking off in an airplane without knowing where you’re going to land, just hoping you have enough fuel to find a landing strip.

Creating an effective investment strategy that incorporates exit points can be quite complicated. This depends on the criteria for buying stocks initially.

Some investors look at the company fundamentals, such as revenues and earnings, while other investors have an investment strategy that is primarily technical based, analyzing charts.

Regardless of the investment strategy, one must follow their thesis. This means that if the reason you bought the stock changes, you must close the position.

There’s an old saying when it comes to buying stocks: “Don’t fall in love with a position.” A human bias is to automatically look for confirming information when one is in a position.

Part of creating an investment strategy prior to buying stocks is that you would then have a roadmap of how to handle both the entry and exit points of the investment.

While all of this sounds like a lot of work, it is necessary. An investment strategy is not something that is created in five minutes. Many people spend hours every week watching TV, yet pay little attention to their portfolio.

Remember, the individual must take full responsibility when it comes to buying stocks. An investment strategy is only as good as the level of research and due diligence conducted.

The good news is that the average retail investor can create a successful and effective long-term investment strategy.

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