CASH - As an investor starting out the one thing you don't want to do is invest using margin financing. You could end your investment journey before it takes off. You need to have a certain amount of capital put aside that is unencumbered. This will not only give you the holding power when your stock is down in the short term but allow you to invest further in the stock at better value. Therefore, not converting all your cash into stocks at the beginning is also important. As a rule of thumb keep 15% -20% of your cash uninvested so you can grab the opportunity when it arises. Margin financing can be a great tool to help pick up stocks when they present a great value during a bear market. However, this has to be done with caution and with experience.
CALM - The markets are more volatile than ever. Even basic economic fundamentals don't apply anymore as we saw with the softening of treasury yields last week. In a typical economic scenario of recovery and improved economic data you would expect yields to go up and perhaps affect the high growth stock sectors to dip but the opposite happened. In addition, easy access to data and application of artificial intelligence or algorithms to trade today allows more and more individuals and firms to;
a) have their own interpretation towards expected outcomes
b) enable them to impact the markets at great speed & magnitude
All this creates more volatility and therefore a sense of calm is required in order for us to stay clear of all the chaos and stay focused on our investment goals. It's important also not to lose sight of great opportunities that may arise from volatility and that can only happen if we are steely-nerved. This is usually built overtime with trading experience.
CONVICTION - Knowing why you are investing in a particular stock , ETF or even bond is a critical first step. What are the key drivers relating to the particular asset that has convinced you to make it your top pick ? What is your risk appetite and your tolerance for potential loss? Once these questions have been clearly answered and a portfolio of stocks (or a single stock) identified, we can then place our investment with conviction. Despite the volatility and contradicting analysis from various experts we can sleep peacefully knowing we made the right investment and are confident about the company's (or the asset's) future prospects. Take Apple for example, If you had invested in the stock at USD133.00 at the beginning of Feb 2021 and saw the stock dip to USD117.00 on 8th of March chances are without the required conviction you would have sold it to avoid further losses and missed the opportunity to see it rise up again to USD135.00 on 16th of April. Conducting due diligence and understanding the fundamentals of a company before investing is key to having conviction to hold the stock until your ROI goals are met.
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