Opportunity cost. AKA “what did I miss?” One of the most frustrating things about investing and trading is feeling like you missed out on opportunities to make money. As I said before, if you’re not letting your money work for you, you’ve already lost. You’ll never get where you really want to go financially. So you get on the highway of investing and trading. The most dangerous mistake people make is rushing it. Feeling like they missed out already, they think they can make up ground by swerving out of their lane, out of their designated path.
First, there are endless opportunities in the stock market alone. You create even more opportunities depending on long term strategies, short term strategies, and your trading plan. Add in options, futures, forex, and other markets for unlimited endless opportunities. Don’t chase a train that’s already left, only to get run over by the next train seconds behind it. Coming from this mindset of abundance, as long as you’re actively engaged, looking for opportunities, and following your investing or trading plans, you’ll keep growing your money machine.
For those managing your own investing or trading (instead of mutual funds, hedge funds, or CTAs), do include profit-taking in your plans. As the saying goes, “no one ever went broke taking a profit.” What hurts more is “if you don’t take profits, the market will take it for you.” Meaning all your profits in the stock gets wiped out when the stock drops. Profits in your account are just virtual “paper” profits until you actually sell and cash out. The main reason people don’t want to take profits is fear of missing out on further gains. However, you can take some profits without selling everything. More importantly, knowing as you do now that there are abundant opportunities, only by selling do you free up cash to take advantage of such opportunities.
If you feel like there are limited opportunities, educate yourself. It’s what this series is designed to do. To show you not just how to identify good trades and investments, but also a palette of simple strategies you can mix and match to create your own opportunities.
Second, and essential to your financial survival, is staying in your designated path. Follow the guidelines I set for you about properly dividing up your money to build your money machine. Taking money from your safety component to buy stocks in a small internet company is not ok. Use the money you’ve put in the growth component to invest in riskier companies or trade for income. When you start breaking your financial plan, you’re sabotaging your own future. You’re the only one responsible for your own future, and you’re the only one who’ll gain or suffer from what you do.
Investing for the Long Term or Trading Short Term for Income?
You’ve all heard this stock market cliche haven’t you? “Don’t let a trade turn into an investment.” Just the same, I’ll add “Don’t let an investment become a trade.” There is a reason why investing and trading are two separate parts. Money for investing is money you won’t need anytime soon so you can let it slowly grow with the companies you invest in. The feeling of missed opportunities is a common problem for investors. As I said, investing is acting as the owner, committing your money for years. Obviously many other short term and long term opportunities will come along in that time. It’s tempting to chase all the opportunities out there. Money for trading is basically capital for your own business. You trade this money daily, weekly, or monthly for income.
What’s the opportunity cost for letting a trade become an investment? Say you buy a stock for a trade, just to make a few hundred dollars. When the stock falls, instead of selling it for a small loss so you’ll have money to trade something else, you decide to own the stock for years as an investment. For now, all the money you put into this stock becomes unavailable. You now have less money to trade for income.
What’s the opportunity cost for letting an investment become a trade? When one of your stock investments is volatile, meaning the stock price moves up and down a lot, maybe several percent per week or even per day, you may be tempted to sell high and buy it back lower. You’ll think, the stock moves so much, I should take advantage of these big price swings and make extra money. However, it may cost you if you had just sold some or all of this stock, thinking it’ll go lower, and it continues to go higher as the reason you invested in the stock starts to pan out. That’s not to say you can’t trade around an investment. Many do, but it’s not easy. Trading and investing requires somewhat different skill sets. You’ll have to be very aware of what you’re doing so you don’t miss out on your investment by trying to make some extra cash trading it.
For beginners who want to trade a stock they own for an investment, I suggest owning the same stock in two separate broker accounts: an account for trading and an account for investing. Only trade around the stock’s price moves in the trading account. This way, you’ll always own the stock in the investing account.