Investing in the stock market without an investment plan is like simply throwing darts in the air hoping to hit something good. An investment plan gives you a concrete aim – a real way to manage your returns. Your particular plan will depend on what types of investments you are looking for (sectors, industries, profit margins and the like) along with a quantifiable number you are comfortable losing. Investment Models Inc. gives you professional investment advice to make your decisions easy and profitable.
Here are a few reasons explaining why you need an investment plan.
In the absence of an investment plan, you tend to sell a stock when you feel like it had run its course. This leaves much to chance. With an investment plan in place, your decision to sell becomes more calculated and spot-on. Now, when you buy a stock, you can decide how much you are comfortable losing on it and set a stop loss order at that amount, the typical amount being in the 10-20% range. If the stock goes up, you readjust the stop loss order to continue to trail by the chosen percentage. This approach ensures that your investments are guided by numbers rather than emotion or guess-work.
Say you’re on a vacation and one of your stocks takes a nose dive and loses 30% over a span of the few days that you are away. Without a stop loss order in place – as would be the case in the absence of a solid investment plan – this will imply that you have taken a dip with everyone else. By contrast, if you did have a stop loss order in place you will likely have gotten out much sooner, limiting your loss to an amount you are comfortable with.
We all know the one rule of stock market investment: buy low, sell high. However, many times it is the exact opposite of what actually happens. We get apprehensive of what is going on and jump ship to avoid further losses. The problem is that many times the stock comes back and if you had bailed out then you miss out on some decent returns. Following a well thought-out investment plan will help you avoid such mistakes.
It is surprisingly common for investors to make the mistake of not looking at their portfolio as a whole. But the simple fact is that the parts make up the whole. When you don’t look at it that way, you risk being either over-diversified or being overly concentrated in just a few sectors or stocks. This is where an investment plan can help you out. It enables you to look at your investment portfolio as a whole in order to make sure you are properly and adequately diversified to avoid complications in the future.
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