How to Improve Your Investing Habits

Consider this list of 10 ideas to help improve your investing habits. Adopt one of them or all of them—find what works for you. I try to use all of them in my own investing.

1. Cut ALL losses short.

2. Calculate your risk for every trade before (or as soon as) you execute it. That means you’re effectively telling yourself, “I’m buying XYZ at 50 a share, and I’m buying $10,000 worth of it. If it falls 15%, I’m selling, no questions asked, which means my total risk is $1,500.” It’s just that simple…but it means you’re not extending yourself too far if things go awry.

3. Keep records of every stock you buy and sell. You can’t expect to learn if you don’t review at least some of your trades (preferably, the really good ones and really bad ones). You don’t have to be overly meticulous, but keeping transaction records, printing out a few charts and jotting down some notes (on why you bought or sold) every few weeks can prove valuable.

4. Keep records of your portfolio. Far too many investors simply go day-to-day, week-to-week, without really knowing how much money they’re making or losing. I know you get statements, but you should also enter your portfolio’s total value into a spreadsheet at the end of each month. (Don’t do it every day … it can be overwhelming and tedious.) Make a few charts to track how you’re doing, too.

5. Set performance goals. Of course, it’s easy to say, “I want to make 50% this year!” But better goals might be, “I’m going to outperform the market by 15%,” or “I’m going to avoid having three losing months in a row.” In other words, something that’s more under your control, as opposed to effectively hoping the market acts well (which might allow you to make 50%).

6. Find someone else to share your goals, successes and failures with. Goals are nice, but if you’re the only one who knows them, it’s too easy to lose track of them. Thus, even if it’s someone who’s not in the market (you might share some investment goals with your spouse, and he/she might share some professional goals with you), letting someone else in on your aspirations is a good thing.

7. Set a maximum percent-invested position when the market’s trend is down. Maybe you want to alter this resolution, but the point here is to force yourself to respect market timing. If the market turns down (possibly via our Cabot Tides, which measures the intermediate-term trend), you want to raise at least some cash.

8. Sell some winners on the way up. I call this “forcing yourself to fall out of love.” In my experience, most investors hate to sell their stocks, both winners and losers. Hooey! Doing so will put some profits in your pocket, while also getting you mentally accustomed to selling offensively, instead of defensively (i.e., waiting for a stop to be hit, etc.).

9. Reward yourself. Too many investors buy and sell, buy and sell, until the profits and losses lose some of their meaning. Thus, if you have a good first six months of 2009, or a good quarter, or even one superb trade (say, doubling your money on a stock), don’t be afraid to take some of those winnings out of your brokerage account and enjoy them; take your spouse out to a fancy dinner or plan a family vacation. If it’s a retirement account you’re using, you can’t take the money out … but you can still use some of your “regular” money to reward yourself for a job well done.

10. Take a couple of regular breaks during the year, and also a couple of spontaneous ones if your stress level gets too high. If you’ve made a few losing trades in a row, or if you’re in the midst of a losing streak, there’s nothing wrong with walking away for a week or so, taking a deep breath, and re-assessing. The investors who keep forcing the issue usually are the ones that dig themselves into deep holes.

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