Some cliches are worth repeating and remembering especially when it comes to your hard earned money. Before you make your next investment take a moment to remember these old adages...
1. Cash Is King:
There's absolutely no need to always be fully invested. There's nothing wrong with having a larger than normal amount of cash in your investment account. Think of cash as a position. Or better yet as ammunition. Think of the financial crisis of 2009 or more recently the sell off in oil and gas related stocks. Having cash allows you take advantage of extreme situations when the markets offer up incredible opportunities.
2. Don't Try and Catch a Falling Knife:
This is very applicable in today's volatile markets and terrible start to the new year. If you've read my blog posts in the past you've heard me repeat this many times. No one knows where the bottom is. I would much rather miss the first 10 to 15% move off of the bottom then buy into a falling market. If you cannot resist the urge to buy then dip your toe in with a fraction of your regular position size.
3. The Trend is Your Friend:
The chances of you buying the exact bottom or selling at the exact top is about as close to zero as you can get. People love to be proven right and often times we experience more pain from missing an opportunity then when we do from losing money. When the bottom is in and prices start to make higher highs and higher lows there will be plenty of time to participate and make money from the trend.
4. Cut Your Losses Short and Let Your Winners Run:
A very commonly used phrase in trading and investing but easier said then done. Even the most seasoned investors fail to do this and allow losses to get out of hand. We hate being wrong and taking a loss is emotionally difficult. By keeping losses small we live to fight another day. One big loss can blow up an account and take many months or years to recover from. On the flip side we often realize our gains too soon. We want the feeling of being right and ringing the register with a realized profit. This is OK if you have a profit target in mind but it's best to let your winners ride and let the market take you out via trailing stop. Give your profitable positions room to move and work their way higher. Get rid of your losers quickly while they are small and manageable.
5. Markets Can Remain Irrational Longer Than You Can Remain Solvent:
Not the most commonly used saying but one of my favorites. Just because something appears to be "cheap" or "can't possibly go any lower" doesn't mean that it has to go up. Prices can go lower or even get "cheaper" than anyone can imagine. How many times did you hear oil has bottomed over the last year and a half? What people forget is that markets don't only go higher and lower but can go sideways for a very long time. This can tie up valuable capital that could be used for investing in better opportunities.
Cliches yes. But should they be ignored, forgotten and consider trite? No. Never. As simple as they sound they hold a ton of value and can save you from devastating losses. When the markets become volatile and the headlines confusing its best to keep things simple. By remembering these simple cliches it just may help you navigate through some tough investing decisions you face this year.
Make 2016 the year you start to take control of your investments.