It is all about confidence- The Australian Investment Education. Last week, I was up in Malaysia and killing time on the flight. While digesting a rather nice steak and shiraz combo, chatted in a lot of depth with my colleague, on the current market – where to, what and when. Standard fodder for a couple of traders sitting on a plane together. And a couple of things dropped out of that chat, possibly another book, which prompted me to ask more questions of more people.
Market Correction
Almost every decade, there has been a correction – the ‘29 crash, the ‘74 oil shock, ‘87 crash, ‘97 currency collapse, 2000 dotcom boom/bust and then of course, the GFC! In almost all cases, to date, the market recovers, reaches new highs and money is made back – albeit only by those with confidence who get back in.
Tenacity and Mindset
Here’s the thing. Having the tenacity and mindset to get back in and recover is not easy – then again anything worth having is generally not that easy. Sadly, many investors bailed out, often at or near the lows, missing out on all the recovery and the potential to recover on their positions. Some have turned their back on the market altogether.
So what is the world like, post GFC?
And I say post GFC as it has been and gone, yet is still referred to in the present tense “oh – well it’s the GFC”. The GFC occurred in 2007/8 with a subsequent credit crunch. Tough times for many – I know I was running my companies then, and trading too – turnover simply evaporated overnight.
However, the spectre of the GFC has remained, with investors far more risk conscious and reluctantly dipping a toe, rather than committing. This has meant a spate of missed opportunity ie underweight positions during recovery, which is of course, understandable. Sadly too, dipping a toe rather than committing – just like a tackle in football is where you get injured – commit fully and get the shoulder in there – no problem – dangle the arm half heartedly and you will be in trouble.
Stock Market Index
Looking at the broad stock market index – here in Australia we plonked on more than a thousand points – that was 25% plus – in just a few months from the market’s low. Looking at the US, post GFC has been a bull market – with the Dow now around 2000 points higher than its pre GFC highs, more than doubling from its lows of 2009. Alternatively, the new economy – as measured by the technology laden NASDAQ has almost tripled over the same time frame.
And believe it or not, many investors are sitting back and saying that they are “waiting for the market to recover”.
So back to Malaysia.
I spent much of Saturday with one group of our clients, working on trading psychology and isolating the profit roadblocks that as new investors, we can often have. Confidence, as always is a major element to this and the group worked well through the session.
By reframing and putting out some time tested strategy pointers, we moved forward nicely.
So where to from here
Entering positions with an appropriate weighting ie not too big and not too small is a critical part of the trading process. Too big increases risk, too small diminishes outperformance and this is an important balancing act.
Trade to your comfort and competency level – many investors – especially those that are new, start with small amounts of cash “to test it all out” and due to account size almost have to trade with large amounts of leverage ie CFDs or options only. This is precisely what they shouldn’t be doing, but it is understandable.
Risk Management
Always use risk management on every trade. This is truly a non-negotiable point and is where so many people have come unstuck. Having stop losses are simply a must. Using put options to protect the value of your shares may also be appropriate, especially if you are using a margin loan. In reality, this is just plain sensible, but an all too often missed step.
Only take trades that you understand and believe in. This is another important step in terms of peace of mind and accountability. Over the years, I have always advocated the view that you should be able to explain to a third party the basis for the trade and why you are in it. It is a great way to test your own knowledge. In all seriousness though, if you try and describe what and why a particular trade and the other party has the “stunned mullet” look, then you know you need to work on your knowledge or delivery!
Opportunity
Interestingly, as we see markets pause for a breath, this is a great opportunity to build up that confidence, strategy and of course, given that super contributions are increasing from July, getting that money working for you right away from July 1st.
We have had a lot of requests for a round of live presentations so we will be on the road in July – watch this space with our new format events that you will be hearing about shortly.
Waiting for the post GFC recovery is just a story and a work of fiction in fact, that many may be telling themselves as an excuse to sit this one out.
It is a great time to be stepping up and building your confidence – as well as writing a new ending, to an old GFC story!
