On an otherwise beautiful autumn day in 2008, a novice investor named Chris watched one of his very first stock purchases lose nearly a quarter of its value in just one day.
A financial crisis brewed on Wall Street. No investment was safe from the carnage. Chris � who happens to be an old college buddy of mine � struggled to understand where he went wrong.
The next time we spoke, he recounted the horror of seeing his investment disappear in the blink of an eye. I did my best to commiserate. But I didn�t have much to say. After all, no one was safe from falling stock prices in 2008.
Chris wanted to know how to cope with such a big loss.
�What happens now?� he said.
I responded with a simple question: What are your investing goals?
Chris didn�t have an answer for me. He knew he was interested in the markets. He also knew he wanted to make money. But he never considered the specifics � or the process. Instead of fine-tuning an investment strategy, Chris was throwing darts. It only left him confused and unsure about his next move.
To be clear, Chris� first mistake wasn�t investing in stocks in 2008. His mistake was that he did not have a plan. He never even considered it. He liked the idea of the stock market, but he didn�t know how to get started.
It�s absolutely crucial to trade with a plan. You have to set goals. And you must know how to achieve them. I receive countless e-mails every day from novice investors just like Chris. They want to get involved in the markets, but they aren�t sure how…
I have no idea how to develop a trading plan. I subscribe to several newsletters which recommend specific stocks, and then I choose ones that fit my values.
How does one develop a trading plan?
� M.S.
I understand that investors have many styles of trading plans. Are you able to share a simple but safe stock trading plan for the novice investor in your newsletter?
� R.P.
Today, I want to show you how you can avoid starting off your investing career on the wrong foot. I have an easy-to-follow plan that will help you dominate the market�s steep learning curve, giving you the confidence you need to invest in a way that works best for you.
Your journey will begin with the simple question I asked my old friend: What are your investing goals?
It�s a short question that requires a detailed answer. The first part of this answer is a litmus test that every new investor should consider…
Personality is Key
What are your investing goals? Are you interested in growing your account or preserving wealth? Do you like taking risks or do you play it safe?
This is how you begin to find out what part of the market you should concentrate your efforts. In truth, there are many ways to make money and protect your investments. Individual investors have made fortunes buying stocks, shorting stocks, buying options, dabbling in commodities and even investing overseas. The key is finding a niche that works well with your personality.
If you don�t want to actively manage your account every few hours, you probably don�t want to be a day trader. The same goes if you can�t sleep at night knowing that a chunk of your money is tied up in a riskier growth stock.
It�s all about your comfort level. When you figure out your acceptable investing risks, you will quickly narrow down your choices. Then, when you�re comfortable with your expected risks, you need to gravitate toward your interests.
Do you like looking at stock charts? If so, maybe technical trading will appeal to you. If you�d rather sift through financial statements, value investing might become your preferred game.
As with most choices you make, you�ll have a much better chance at success if you pick the techniques that best fit your interests. It�s that simple.
Who Has Time For Stocks?
The second piece of the puzzle involves the amount of time you can dedicate to the markets.
One of the biggest mistakes that beginners make is jumping into new investments without a set routine. If you�re working a high-demand job 60 hours per week, you won�t have time to make trades on your computer during the middle of the day. And if you can�t dedicate a few minutes on the weekends to keep up with the latest market-moving news, you�ll want to explore more longer-term investment options.
Conversely, if you have plenty of free time during the day, maybe actively trading stocks is right for you. But I must caution you � short-term trading of any kind requires research and discipline. Day trading is an especially risky proposition for a newcomer. Don�t jump into this discipline expecting to win right away!
No matter what your strategy, I urge you to paper trade before putting your hard-earned money on the line. Some online brokers even offer paper trade accounts to help you practice. These resources can be invaluable. I also recommend you keep a journal of your winning and losing ideas. This will help you begin to fine-tune your strategies. When the time comes to put real money on a trade, you�ll be confident and prepared.
Find the Right Resources
Finally, you need to know where to look for quality resources and tutorials. Find blogs or e-letters that offer impartial ideas and advice � like this one! Learn from more experienced traders and investors. And be sure to read the great standards of your chosen discipline.
If you want to get into trading, you should check out the personalities profiled in the Market Wizards series by Jack D. Schwager. If you fancy yourself a value investor, you should pick up a copy of The Intelligent Investor by Benjamin Graham. These great works will lead you toward new ideas and sources that will help you develop the strategies you need to find success…
One More Thing: Ask Questions!
Never hesitate to ask questions. You always drop me a line at editor@pennysleuth.com. Feel free to send me your questions, tickers, and charts. I can annotate the charts for you and give my honest feedback, tell you if a penny stock looks like a scam, or even offer some insight into different investment philosophies. I�ll compile the best questions into a �mailbag� section every week. This way, we can all benefit from the discussion.
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