How to avoid the biggest mistake traders and investors make
Published in the Have a Go News, June 2012 by Dale Gillham
Last month I had the pleasure of presenting for the ASX at an Investor Hour seminar in Melbourne.
When considering what information to share with the audience, it became very clear that it should be the leading misconception about trading and investing.
Year in year out, in a bull or bear market, the biggest single mistake people make is not selling.
Not selling does not always mean not selling when in a loss, as this is what most people think of when I reference selling shares.
Not selling can be to not sell when in profit, and not selling when in profit can affect your profitability just as much as not selling when in a loss.
When I asked my audience of predominantly retirees, who knew how and when to buy shares, very few people raised their hand.
In addition when I asked my audience who knew how and when to sell shares there were even fewer hands raised.
Normally approximately 80 per cent of traders and investors I see know when to buy, but virtually none know when to sell.
So why are retirees so in the dark about what to do? Is it because they think it is all too hard or that they don't know where to start?
As all those who attended the seminar found, understanding buying and selling is really quite simple.
I also asked my audience how much time they spent looking at what to buy and what to sell and I then asked them to contemplate the difference.
In my experience, about 80 per cent to 90 per cent of their time is devoted to what to buy and not what to sell.
I would argue that this should be reversed.
The key reasons people don't sell shares they are losing on or why they don't sell their profitable shares are emotional.
It is far easier to deal with a paper loss than the emotion of seeing it in your bank account.
Further, people are fearful of missing out as they believe the past performances will continue, which is not necessarily the case.
The trick is not in finding the best performing share to buy from the past 'year, but rather the one that will perform in the next year.
When our money is on the market we do not have the control the market does, and so realising a profit by selling can prove difficult if you don't know some basic rules.
These rules include using stop losses along with some other very basic tools which due to space I can't explain here, but did so in my presentation.
When faced with retirement, trading and investing can be daunting, but the right education and expertise can assist with the decision making process and make it that extra bit easier.
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