Accountancy Resources
Millions of people invest in the stock market — and for good reason. Historically, such investments made it possible for people to achieve a higher standard of living and to attain financial security: a comfortable retirement, the ability to pay for children to attend college, buying a home, etc.
These long-term investors have encountered good times and bad times. Studies show that active traders fared far worse than those who maintained their investments.
In addition, those who tried to time the market underperformed buy and hold investors.
Long-term investors should be concerned with managing risk, but few understand how to do that and tend to ignore risk management. (Readers of this column already know-how options are used to reduce risk.)
A far smaller number of people are full-time or active traders. They understand that trading is a business and must generate consistent profits to sustain themselves and their families. For these traders, the goal is obvious: Be certain that the chances of incurring a large loss are near zero because one large loss may deplete their trading accounts.
Some long-term investors also maintain a small account in which they are active traders. This is a viable plan, as long as they are careful not to take too much risk in the trading account.
This may seem to be a trivial statement (but it is not): It is important to have a goal when investing in the stock market. It is even better to update those goals every few years.
If you ever lose sight of your goals, it is possible to turn success into failure. Why? Markets do not always rise. Years of bull markets can be followed by bear markets that decimate your account value. Sure, the long-term trend has always been higher — but if you need your money — the profits that you earned over many years — it may not be available during a severe market correction.
Therefore:
There is one other recommendation that I have for investors. It is not a commonly accepted practice, but it makes great sense when you think about it:
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