Like most investors, one of your top goals has been to enjoy a financially secure retirement at whatever age you choose. That being the case, it stands to reason that your retirement “nest egg” should ideally generate above-market returns, often with below-market risk.
But to create above-market returns with less risk, you need to invest well.
“There are some investors who simply don’t carefully weigh their stock-investment decisions,” said Brad Barber, co-author of the study All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors, as quoted by TheStreet.
To do so, you need to ask yourself three key questions prior to any trade.
No. 1 – How much can you afford to risk on a single trade?
The key question is, “How much can you really afford to lose on a single trade?”
What is your key number that would allow you to sleep well at night. Can you afford to lose $10,000 on a single trade and be okay losing it all, worst-case scenario?
If not, reconsider your risk. If you can’t afford to lose $10,000, consider cutting it in half, in quarters, or even in tenths. Consider stretching it out so it last longer.
An old friend of mine foolishly invested $10,000 on a hot tip from his neighbor. In a day, the stock fell from $15 to $5 on earnings. He couldn’t afford to lose that kind of money. While he now knows better, paying his rent on time for the next two months was an issue.
No. 2 – What is your financial roadmap?
Before you make any investments, take a good look at your current financial situation, says the US SEC. “There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.”
No. 3 – Are you an emotional trader?
We can’t tell you how many people trade on emotion.
Their stock falls 50 cents. They panic. They sell. Then the stock moves back up. And they curse themselves. Your emotional ability to deal with risk should be considered always. You must also understand that your risk tolerance will change over time, as your age, income, and life circumstances change.
If you find yourself getting caught up in emotion, walk away and reconsider your actions.