Daily Gains Letter

Two Simple Strategies to Take Control of Your Portfolio

By for Daily Gains Letter | Mar 12, 2013

120313_DL_zulfiqarThe housing slump in 2007 and the financial crisis following it left the U.S. economy in sorrow. Millions of Americans lost their savings due to the stock market collapsing to the lowest levels experienced in a while. Key stock indices in the U.S. have shed more than half of their value, and some of the well-known companies went underwater.

Having said that, the key stock indices in the U.S. are back to where they were before the financial crisis began. But while the stock markets have recovered, many investors have lost courage to get back into the markets. What should investors do if they are unsure about investing in the stock market again?

The most important thing investors need to keep in mind is that fluctuations in the stock market are very normal—they shouldn’t discourage investors from investing and growing the value of their portfolios.

There have been many instances in the past when the key stock indices in the U.S. plummeted, leaving investors in misery.

Furthermore, investors need to know that investing in the stock market isn’t easy either. No matter how much information an investor might have about a stock, there is still some risk associated with it—sometimes, losses are imminent no matter how good the company may be. Losses can occur as a result of poor overall market conditions or many other factors.

However, if investors master two techniques—taking profits and learning from mistakes—they can minimize their losses, and at the end of the day, they can become better investors.

1. Taking Profits

As I mentioned earlier, key stock indices are trading at the same levels they were before the financial crisis struck the U.S. economy. But let me ask you this one question: are the key stock indices going to go higher, stay at their current levels, or move downward?

The answer is simple: it doesn’t matter. No matter what the situation may be, if you have some gains on your holdings, take some money off the table. Making money in the stock market certainly feels good, but giving away the profits you have made can be one of the biggest and most common investor mistakes.

By taking profits, investors have not only made some return on their investment, they have also reduced their risk to the downside or the upside, depending on their position, and have some cash on hand for future opportunities.

2. Learning from Mistakes

Thomas Edison once said, “I have not failed. I’ve just found 10,000 ways that won’t work.” (Source: BrainyQuote.com, last accessed March 8, 2013.)

Investors should look at the stock market and investing in stocks in the same way. Let’s face it, investors experience losses. The best thing investors can do to protect from losses, though, is to learn what happened and why they incurred a loss. A good way to begin learning from your mistakes would be to write them down and read them regularly.

The main idea behind learning from mistakes is that investors are more aware of what to do the next time they’re faced with a similar situation. If investors don’t learn from their mistakes, then they add extra risk to their portfolios—by making the same mistake again and again.

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