One of the most difficult aspects of investing is knowing when to buy, sell, or hold the items in your portfolio. While there is no right answer and no way to ensure that you “win” your battle with the stock market, you can at least make an educated guess.
It’s important to know whether your stock is fluctuating just because of day-to-day changes or if there is something bigger going awry. Many financial advisors suggest that if a stock drops 20% below what you paid for it, it might be wise to switch to a stock that is on the rise. You can also average the price of a stock for 30 weeks to determine the moving average. When that goes down, it could be a sign that the stock is in trouble. Averaging 30 weeks also helps to factor out the day-to-day fluctuations that affect all stocks so that you can make an educated choice.
If you do make a wise investment that leads to a profit, it can be really tempting to spend the earnings, but you might want to hold on to them. Here’s a scenario: Let’s say you recently invested in an airline that was about to go bankrupt. Despite the rumors, you know that airlines frequently merge so you take a chance on the stock. A few weeks later, the airline announces that it is, in fact, merging with another. You were right, and the stock quadruples.
Now, it may be tempting to jump up and down and buy yourself something special with the few thousand dollars of income you weren’t expecting. However, one of the wealthiest people in the world, Warren Buffet, advises to always re-invest your profits. After all, that’s how he became a billionaire.
For those not in the know, Warren Buffet’s career as an investor started out when he was just a teenager who bought a pinball machine. Instead of collecting nickels from the pinball machine and going to buy a new pair of shoes with the earnings, Mr. Buffet bought another pinball machine and so on. Today, he’s one of the wealthiest people in the world.
So, when you make a profit, whether it’s in your own company or in the stock market, re-invest your earnings. Many people are worried that they will lose all their earnings this way, but if you choose wisely and are conservative with your investment choices, you have everything to gain.
In sum, I suppose the title of this post should have been “Know When To Hold Them, Fold Them, & Re-Invest Them” as those are the primary principles to follow when it comes to the stock market.
While I don’t claim to be an expert trader by any means, I do know that investing in the stock market takes a significant amount of time, research, and dedication. Remember, talk to your financial advisors. You don’t want to buy a stock just because your friend, neighbor, or uncle told you to.
How do you decide when to hold them and when to fold them when it comes to investing?
Photo Credit: FreeDigitalPhotos.net