When you look at the markets each day it can be tempting to experiment with different strategies or make short term trades. Despite this, it is likely best to stick to a strategy (perhaps refining as you go) based on buying a diversified portfolio of good stocks and monitoring them while reinvesting dividends. My own approach has been centered on a diversified portfolio of smallish growth stocks, with solid balance sheets and which are turning a profit, whilst maintaining a long-term outlook.
If you spend enough time looking at the stock market, you will see things that give you ideas that can be risky and untested. You may think “maybe I’ll have a crack” at that stock or strategy and just put a small amount in. But a small amount still counts, and as Peter Lynch said, and I agree from experience – long shots hardly ever pay off.
Reading articles about companies that are in trouble, cheap as chips, maybe with big dividend yields, you may find yourself tempted to dive in. But there is usually a reason the company is not doing well and the price is so low. Big or small amounts invested in distressed companies is still money that could instead be invested in a company with stronger fundamentals and a more positive outlook.
While turnarounds and distressed companies can be profitable at times, it is a gamble that does not always pay off. It can also take a long time for a distressed company to get back on track. Be wary of the temptation of “cheap” stocks when it comes at the expense of your investment strategy. I have my strategy and investing philosophy written down so I can refer to them every so often. As you learn and become more experienced your strategy may be refined and evolve.
Short term trading can be seen as exciting – you are buying and selling, holding stocks for short periods only, and locking in profits (sometimes). Holding long term offers its own rewards, however, not to mention saving trading fees. The price still moves up and down each day, announcements are made, and markets and industry are always changing. You can observe all of this whilst holding your stocks. It can be tempting to trade, but there is great satisfaction to be had from watching the small cap companies you are a shareholder of grow into large cap companies that pay and increase dividends along the way.
It can also be tempting to try different investing products. Contracts for Difference (CFDs), options, futures, binary options and shorts, to name a few, are not designed for long term investors. Most of these products have a limited lifetime. Some have ongoing costs that must be paid while the position is open, so only suit short term traders, and others allow you to lose more than you invested.
I prefer shares because you can only lose what you invest, but the gains are unlimited. You pay brokerage when you buy and then you own part of the company. You don’t need to pay any ongoing costs until you sell, and can hold the stocks for as long as you please, which is vitally important as a business takes time to grow.
Once you start investing you will see for yourself what works for you and the similar characteristics of your winners. It can be tempting to try different theories and go for the quick buck. The more reliable approach, however, is to diversify, keep investing costs low, and have a long-term outlook.