Happy New Year! The world is turning to a focus on (maybe) rising interest rates, fear of inflation, and “value” stocks in many ways, or at least so says the perpetual punditry machine that is investment media.
Nobody really knows what’s going to happen next month, of course, or for the next year… nobody should be at all certain about what events or mass delusions might come upon us next to make us excited about a topic, a trend, or a certain kind of investment.
A year ago it was stupid meme stocks like GameStop and AMC and wild growth stories in cloud software and electric cars and cryptocurrencies and all things SPAC that captured the attention of investors… perhaps this year, as so many pundits believe, it will be enthusiasm for oil stocks, or even mining companies, as inflation puts some wind in their sails. That’s a decent guess, I’d say, but we’re all guessing.
The bubble has been deflating for the high-growth, high-valuation names in recent months, almost without exception, and that’s nerve-wracking for investors in those stocks — so even though we don’t get to know at which levels the prices of growth stocks might settle in this recent downturn, it’s important to be clear with yourself about what your plan is.
Are these investments you make because you think someone will pay you more for them in six months or a year? If so, you need to take profits along the way when you’ve generated a good return, because you’re a trader and you’re depending on closing successful trades to keep your portfolio growing over time. Traders have to consistently generate “wins” to keep going… and also have to sell, using stop losses or some other methodology, if things turn ugly in the short term.
What do I mean by that? Mostly that you need to know what your plan is… and you need to balance your risks with your potential gains. If you’re holding out for the best companies to gain 1,000% over a decade, it’s OK to sit through 50% losses and it’s OK if a few of those investments end up failing. If you’re going to always sell after a 50% or 100% gain, however, you can’t tolerate many 50% losses. That’s just the math for the average investor — if you stick with stocks for ...