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We'll show you how to get a better understanding of the markets and become a confident, competent investor. And we lay it all out for you in plain English (well, a Southern variety of English, anyway). Hey, you work hard for your money - learn how to make your money work hard for you!
When Investors Should Act Like Traders
Act II: Go with the Flow
Short term trading is tough, especially for us time-strapped working folks. We’re usually better off sticking to long term investing, like our 401(k) or IRA. Heck, finding time to do that usually isn’t easy, between hauling kids, household chores and work!
There are a few things us regular investors can learn from traders, though. We’re looking at some of those things in a series of blog posts here. This is our second post, entitled “Go with the Flow.”
Short term trading is tough. Oh yeah, we said that already. But it bears repeating. It’s a zero sum game pitting little guys against big traders, men against machines, institutions against hedge funds…well, you get the idea – it’s tough!
Successful traders have one thing in common: a plan. They have a trading plan with a list of things that have to be checked off before they enter a trade. Things like position size, entry/exit points and so on all have to be in their favor before they open a trade. One of the most important things on their checklist is the current major market trend.
Traders know they have a better chance of having a winning trade if they align their trades with the current market trend. They only open long trades in bull markets; they only open short trades in bear markets. They ‘go with the flow’ of the markets’ trends.
Why is it so important to go with the flow? Because about 70% of all stocks move in the direction of the major trend, whether it’s an uptrend or downtrend. That’s a pretty hefty percentage to have on your side if you’re putting your hard-earned money to work!
> Jill is looking at 2 possible trades that have been on her radar for a while. One is a biotech stock (ABC) she thinks is undervalued and due for a big move to the upside. The other is also a biotech stock (XYZ), but she thinks it’s way overvalued and due to for a fall.
As she fills out her checklist, she notes that the overall stock market and the biotech sector in particular are currently in a strong uptrend. She’d love to short (XYZ), but she sticks to her plan and opens a long position in (ABC).
Over the course of the next 2 weeks, the markets continue to rise as does (ABC), giving Jill a nice little profit. Jill is right about (XYZ) being overvalued, but in those same 2 weeks, it also rises with the sector, meaning Jill would have lost money going short on that stock.
Does Jill’s ‘go with the flow’ checkpoint work for long term investors? You better believe it!
> John just got a raise at work and has decided to put that extra money into his 401(k). He has been wanting to add a global fund and a gold fund to his portfolio. Should he just jump in and buy both with his new moolah? Nah, John’s smart – John’s got a plan…and a checklist of his own!
As he fills out his checklist, he notices that the overall stock market and global stocks in particular are in a strong uptrend. Precious metals, on the other hand, and gold in particular, are in a steep downtrend. John really wants to own some gold, but he sticks to his plan and puts his new money to work in the rising global fund. Smart move, John.
Though they put their money to work in vastly different time frames, Jill & John have the same goal: to make money. Both realize that instead of ‘swimming against the tide,’ they need to ‘go with the flow’ to be successful!
NEWS YOU CAN USE
"Fidelity Trims More Jobs, This Time Through Layoffs"
from Boston Globe
"L.A.'s Capital Group Accused of Bilking
Employees - by Pushing its Own Mutual Funds"
from the Los Angeles Times
"Passive Funds are on Pace to Eat
the Entire US Stock Market by 2030"
"Fidelity Launches 2 Low-cost Index Funds
Focused on Sustainability"
from Boston Globe
"Money Basics: What's the Dow Jones?"
from Yahoo Finance
VIEWS YOU CAN USE
"When to Sell Great Stocks:
Take Profit Regularly, Mostly at 20%-25%"
from Investor's Business Daily
"How to Protect Freelance/Side-Gig Income with an IRA" from Stash
"How Many Funds Do You Really Need to Diversify?"
from Real Deal Retirement
"When Investors Dive into the Unknown"
"Morningstar's Guide to Estate Planning"
Summer Reading List
We talk a lot about making money here, but we don't talk a lot about taking care of it! Here are 4 great books on personal finance to help you out!!
Get smart about your money!!!
>>>>> And just so you know:
Clicking on these book images takes you to Amazon.com via our affiliate link. You won't pay a penny more for what you buy, but we do get a few coins for sending you there - and that helps us cover the costs of keeping our website running free!
Here are a couple of very simple retirement calculators courtesy of our friends over at Calculator Pro.
Here are the figures we used:
> Required Annual Income: we put in what we're making now (we don't buy into that "plan to spend 70% of your working income in retirement" idea!)
> Years until Retirement: we shot for age 65, but who really knows, right?
> Years after Retirement: we sure hope to have 20 good years of doing what we want to do!
> Annual Inflation: we used 3.5% (maybe go a tad higher to be safe?)
> Annual Return on Balance: we used 7% (maybe go a tad lower to be safe?)