We’re optimistic about the stock market in 2011. The recent U.S. midterm election results support our view that the Obama administration is likely to tone down its investor-unsettling policies. Moreover, the stock market has stayed reasonably strong, despite reports of new European financial strains. Year-end retail sales seem to be strengthening. All these are good signs. To put yourself in the best position to profit in 2011, it pays to remember these 3 keys to successful investing:
- Invest for the long term: As a general rule, it’s a mistake to try to read too much into short-term market moves, or the failure of a stock to make a new high. There’s a random element in all short-term stock direction. That’s especially so of junior companies. Many times stocks rise on the expectation of good news, then drop when the good news becomes public. This principal gets summed up in the old-time investor saying about how to trade stocks, “Buy on mystery, sell on history.”
- Resist the urge to invest based on popular themes or fads: When you indulge in theme investing, you allow a theme or concept to take a central place when deciding what to add to your stock portfolio. Today’s popular investment themes include alternative energy, such as solar wind and geothermal, and “cloud computing” (companies that provide software and data storage that you communicate with via the Internet).
Usually the theme or concept includes some prediction about the future that has some truth in it, and will make noticeable changes in society. You may assume that if you can just get aboard that theme or add an investment whose future is tied up with it to your stock portfolio, you are bound to make money.
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- Theme investing can pay off when luck is running your way, and most popular investment themes are supported by facts. But if the theme is your overriding consideration, it’s easy to get sloppy about the details and overlook risk.
- The markets for fungible goods like oil, interest rates and gold are inherently unpredictable. Markets like these are so enormous that there is no practical limit to how much you can trade in them. It follows that if you could predict them, you could wind up acquiring a measurable proportion of all the money in the world, and nobody ever does that. That’s why it’s a mistake to build your portfolio in such a way that you have to accurately predict the future direction of fungible goods like oil, interest rates or gold.
As a member of TSI Network, you may have already seen Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada. If you haven’t yet read this new free report, click here to download your copy today.
