Is 33% return too good to be true?

Investment Education Australian Stock Market
Stock Market

Of course it is! Especially for the inexperienced investor. However, as a seasoned professional. I know there is a reasonable probability of achieving this type of return. And that the key to ongoing success is Money Management.

Quite often novice traders are enticed to participate in the stock market with the dream of making riches. Starting with a small amount of capital. After 15 years in the stock market as a professional analyst and advisor. I have rarely seen an inexperienced trader make millions out of thousands.

Trading or Investing in the stock market is a game of probabilities. It is a balance between Risk and Reward. And like any profession, you need to understand what you are doing, what influences will affect the outcome. And establish a plan in how to manage your investments. Most of all, you need to remove all emotion from your decision making process – the hardest task for a beginner to achieve.

I am not in the game of predicting what the stock market will do. As part of my analytical process, I establish a ‘probability’ of outcome, but I know that I do not control the end result and that the markets will do whatever they want to do.

Think of a child at the grocery store having a tantrum, sitting on the ground, screaming with a dishevelled parent standing by. Although the parent could stand there screaming back at the child attempting to control or tell the child to behave, reality is the child is going to do whatever he/she wants to do. In this case, getting attention by being naughty.

So how do I outperform the markets if I have no control over stock price direction?

Your role as an investor is not to speculate on what direction the markets will trend. There are 3 simple tasks that should define what you do in your decision making process:

1) Stock selection. What strategy approach you want to take will dictate the stock/s that you choose to trade or invest in. If, for example, you want to buy and hold, then you will either choose Growth stocks or Income stocks, or cheap speculative stocks. Each approach has its own Risk parameters. Mixing approaches or chopping and changing is some of the biggest mistakes beginners make.

How do I manage client funds? By using a combination of stocks and options (derivatives) with an Income approach. Contact Us to find out more

2) Non-directional strategies. My philosophy is that if I can’t choose stock direction consistently, then look for an advantage that doesn’t require stock direction. To do this, I use Option strategies such as the Covered Call, Iron Condor, and Credit Spreads. These strategies are too advanced for the beginner. So I would recommend you employ the services of an experienced professional rather than undertake the analysis yourself. You could subscribe to a service that provides recommendations with these strategies, or use an advisor.

3) Money Management. Too many people attempt to invest in the stock market starting with a small amount of money, hoping and praying to turn it into riches. Now, if this was such an easy task to do, I would be out of a profession! Diversification is a key to reducing Risk, but only if it is managed correctly. Positions that are too small need to work harder to cover the cost of brokerage and provide a reasonable return. When this occurs, the trader starts making more speculative decisions in the hope to make a higher return. Each position should be managed so that the Risk of the trade won’t break the bank balance.

Making a return such as 33% on a single trade, or as a total portfolio return over a year, is certainly achievable. But you must have a well thought out plan. The experience in understanding how to achieve this. And manage your decision making.

For you to be able to achieve results anything like this, as a beginner, I would recommend seeking the services of a professional. You should do your research on the various means in which you can invest in the markets, and choose an approach that best suits your investment personality (to find out what type of investor you are click here).

I have spent 15 years in this industry honing my skills as an analyst and trader. Through ups and downs, I have learnt many lessons. And even today continue to fine tune what my decision making and strategy approach. Remember, the markets are dynamic and forever changing. My journey was the hard way, however, starting with a mentor but then taking on the challenge to learn myself. If only I had known what I know now, I may have been writing this article from a very different setting.

Matthew Brown – US Stocks & Options specialist
US Equity & Option Client Advisor

Halifax Investment Services
ASIC Australian Financial Services License Number – 225973

If you would like to learn more about the strategies you can use to profit from any type of market direction, visit www.australianinvestmenteducation.com.au or you can contact Matthew on brown@halifaxonline.com.au

Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.

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