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Resources
Finding
Your Investing Comfort Zone
by
Mark Wolfinger
To participate in the financial markets, both short-term traders
and longer-term investors need to be comfortable about their
holdings and their specific portfolios. In other words, if a
certain position leaves you with a sense of uneasiness or the
inability to sleep at night, it is not for you! Knowing the
boundaries of your personal comfort zone makes it easier to
maintain a portfolio that contains only suitable positions.
So how do you find and establish these boundaries? Read on to
find out.
Why
Should I Be Comfortable?
Establishing a comfort zone is particularly important for a
number of reasons:
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An
uncomfortable trader or investor may allow emotions to
take control of trading decisions.
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Those
who are too complacent may ignore risk.
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Determining
a comfort zone helps you avoid borderline trades that
usually turn out poorly.
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It
helps you recognize when risk has increased.
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It
encourages you to take profits when very little profit
potential remains.
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It
minimizes the possibility that you'll be forced to make
difficult decisions under pressure. Being comfortable
with your positions means that high pressure situations
should occur rarely.
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Settling
Into Your Comfort Zone Being in the "comfort zone" means owning
a portfolio that contains only suitable, well-researched and
understandable holdings.
Arriving
at this type of portfolio involves going over your holdings
yearly and deciding whether the reasons that you bought the
stock still apply. For the stocks that don't make the cut, sell
those positions, even if it results in a loss. Technically,
the loss has already occurred and, except for tax reasons, turning
it from a paper loss to one that is realized makes no difference.
Once you've done this, you can put your money to work where
you believe it will increase in value.
When choosing
new stocks for you portfolio, remember that not every investment
tip is a winner. In fact, it's best to ignore all tips and conduct
your own research.
Long-Term
Investor or Trader?
Despite
the inconsistency of the markets, the vast majority of investors
choose to adopt a long-only approach by purchasing stocks, bonds,
real estate, collectibles, etc. If you have good stock and investment
selection skills, this method will do well over time. If you
don't, and prefer to manage your own portfolio, different skills
are required. For example, it may be worthwhile to learn how
options work and how you can use them to hedge risk in stock
portfolios.
At the same
time, long-term investors must understand when a position is
no longer suitable, either because it has run up in price very
quickly, or the company is not expected to perform well in the
future. You should work hard at mastering this skill - the time
to recognize that some positions are too risky to hold is before
disaster strikes.
The way
you decide to invest in the market will determine your comfort
zone. Day traders hold positions for a very short time. Swing
traders hold longer, but by no means do they attempt to make
long-term trades. And then there are the investors who have
no specified holding period - and for many, that means they
expect to hold for years. Which category you fall into will
affect your comfort zone. For example, the day trader doesn't
worry about sleeping well because positions are not held overnight,
and the long-term investor is less concerned with timing. The
one characteristic these trades should have in common is suitability
for the investor, who must find both the risk and reward potential
of any position acceptable.
Becoming
a full-time trader is a goal for many individual investors,
who see it as a glamorous road to riches, but these perceptions
are false. As with any other profession, it takes education,
practice, skill and discipline to succeed. In the same way that
not everyone can become a professional athlete or movie star,
the simple truth is that not everyone can be a full-time trader.
Keep this in mind when thinking about your comfort zone - if
you don't succeed in making profits as a trader, you probably
won't be very comfortable.
Trading
Within a Comfort Zone
Both long-term
investors and traders must make important decisions. Among the
questions to consider are:
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Is
this a good entry point?
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Is this an appropriate time to invest?
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Is the security fairly priced?
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How much profit do I expect to earn?
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How
much capital is at risk?
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Is
it possible this trade can result in a margin call?
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What's the probability of earning a profit? |
Summary
It's important
to invest or trade so that you are comfortable with the nature
of your holdings - and that's especially true when it comes
to understanding both risk and reward. Once you find your comfort
zone, staying within it will help you make better investment
decisions. If a security doesn't fall within the parameters
of your comfort zone, it's not a good investment for you.
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