I want to start today's article with a quick survey.
Don't worry; it's going to be short, only a couple of questions, and you're the only person who is going to know your answers. So improve your investing savvy and answer honestly.
It might just help you make a lot of money – and sleep better at night…
First question: When the markets hit a rough spot this last March, did you start selling your stocks? If the answer to that question is "yes," what methodology did you use to justify your selling?
Second question: If you did sell your stocks, what methodology do you now plan on using to know when it's time to buy again?
Here's a quick hint: Unless you can quickly answer both of those questions without having to think about it, the answer may be "none" or "no methodology."
Don't feel bad; every investor (including yours truly) has, at one point or another, made an investment decision without a clear plan (or methodology behind the decision).
Here's why that can be such a bad idea, and here's how to tap into the tremendous profits out there if you break out…
What Most Investors Do Wrong
According to Barron's, a whopping 85% of all investor "sell" or "exchange" decisions are wrong. Yikes!
The cycle typically looks like this…
The market starts to sell off (for any number of reasons), investors get spooked and sell their stocks right at (or just before) the point of maximum pessimism (which usually is very close to the bottom).
Once they're out of stocks they take their cash and plow it into safe assets like bonds just in time to miss the beginning of the next leg up in stocks. Once their capital is invested in bonds, they have no idea when to shift back into stocks, mainly because of an emotional bias that leaves them too frightened to take on risk.
If that sounds familiar, again, don't worry – you're not alone. Everyone has made this kind of mistake at least once. We'll just make sure it doesn't happen again.
Instead of using market pullbacks as an excuse to bury your head in the sand and catch up on Dancing with the Stars episodes, you can step up your due diligence to create a buy list of your next investment targets.
At first it might seem uncomfortable to be preparing to buy stocks in the face of uncertainty – but don't worry – you're going to be in great company. Warren Buffett, Jim Rogers, and John Templeton all made their fortunes targeting stocks once they were put on sale by market volatility….so let's follow their lead.
Here are two steps you can take that will not only give you an answer to the questions at the top of the this article, but will also let you use market volatility to your advantage, which is exactly what professional traders do every day.
Set Your "Sell" Plan, Before You Buy
The first step: Always make sure you have an exit strategy (or plan regarding when you'll sell) before you hit the "buy" button. This will ensure that you're always making predetermined strategic decisions rather than emotional decisions.
About the Author
Sid is the investment community's best-kept secret. Since 2009, he has served behind the scenes at Money Map Press as Director of Research, analyzing hundreds of securities and profit opportunities for subscribers. He's an expert in the identification of specific market catalysts with "alpha" potential in a wide variety of industries, but especially the small-cap sector. From his years of research and training, Sid has an extreme attention to detail and a passion for identifying unique opportunities the market doesn't yet understand. He brings those recommendations to members of his Small-Cap Rocket Alert.
Sid is also an accomplished drummer and music producer. He lives in Denver.