Change your perspective: Time and trading psychologyExpand Your Time Scale
A significant 2% selloff like we saw today can sometimes feel like a buying opportunity-- "stocks are on sale!" We humans are extremely impatient, short-term thinkers. Especially when you're new to trading, it's tempting to rush in and buy every "dip."
But to win at investing over the long term, you've really got to develop a much larger sense of perspective. Real corrections unfold on a much larger time frame than a one-day, 2% market drop, and trading too frequently has pretty steep costs.
Lots of studies have shown that on average, the more frequently you trade, the lower your returns. Even in a zero-commission world, you still may lose a few cents on every trade due to "bid/ask spreads," especially if you're trading low-volume securities. Plus, any sale you make is going to be taxed, whereas if you leave that money in the market, your taxes are deferred until later. Those costs compound every year like negative interest, eating into your future returns.
Know Your Human Limitations
The first step to beating the market, frankly, is to understand that you are that easily distracted dog on the movie Up who's constantly shouting "squirrel," and you are always going to be that dog. In other words, the first step to recovery is acknowledging you have a problem.
Once you realize you have a problem, then you've got to create a plan to correct that problem and follow the plan religiously. In this case, you are never going to be able to reformat your brain to operate on geological time. That just isn't how the human brain works. What you can do is adopt tools and systems and habits of behavior to help you think bigger about investing. In this post I hope to give you a few.
Adopt Tools for Thinking Bigger
1. Simply zoom out.
I know a lot of folks are looking at the 5-minute time frame and trading every technical signal they see. If you're beating the market by a wide margin that way, then great. Otherwise, you're better off zooming out. Try using the weekly, or even the monthly chart. When you view equities on a longer time scale, you see different things on the chart. For instance, looking at the S&P 500 on a weekly time frame tells me that the one-year uptrend is still intact, and today's "correction" was nothing in the scheme of things.
On the monthly chart, frankly, there hasn't even been a dip:
2. Don't look at markets every day.
If you're trying to think on a larger time scale, frequent updates are just more opportunities for error. I learned pretty early on in my trading career that I performed better overall if I didn't check my investment account during the day. In fact, for most investors, the best thing they can do is probably dto buy an index and never look at it at all until they retire. Even if you like to be a little more active than that, I'd still suggest checking in no more than once a week.
This applies to consuming market news and analysis as well. Subscribe to only a few highly curated sources of investor news. There's so much information out there, and most of it is just noise. Paradoxically, more information often doesn't make you more informed; it may make you less informed if it's low quality. Let someone really competent filter the noise for you and only give you the most salient sound bites.
3. Set it and forget it.
I use a lot of alerts. I identify a price level I might want to buy or sell, and I set an alert and don't look at it again until my alert triggers. That way I'm not tempted to buy or sell too early. You have to be prepared to create a trading plan and then stick to your plan, no matter how long it takes.
I also use alerts for news. Most companies have an "investor relations" page where you can subscribe to press releases about the company. You don't need to know what the CEO is saying on his Twitter every day, but you probably should be subscribed to the press releases and quarterly earnings report so you'll see immediately if something really major changes about the fundamentals. To follow sector news, you can subscribe to a weekly industry newsletter or set up a Google news alert.
4. Consider setting limitations on yourself.
Think of yourself as a time traveler who's come back in time to prevent your future self from making a big mistake. A mistake like, for instance, buying a market top because you saw a one-day dip of 2%. You know your future self is stupid and you can't cure stupid, so the best you can do is put up obstacles to bad decision-making and hope they'll do the trick.
For instance, I don't much like mutual funds, but one reason to buy a mutual fund rather than an ETF is because they're far less tradeable. For instance, most mutual funds have rules in place that prevent you from withdrawing your funds too soon after depositing them.
Another strategy is simply to remove investment apps from your computer or phone. Make it that much harder to access, so you're not unconsciously opening up the app and compulsively checking your accounts all day. You might even consider locking yourself out of your account and giving the login information to someone you trust, with instructions to only give it back under very specific conditions.
5. Remind yourself.
Set up a regular calendar reminder or put a sticky note on your computer to remind yourself to think on a larger time scale. Go back at the end of the year to revisit trades you entered or exited early, and see how much money you left on the table. Honestly, I think you'll be amazed.
