At the end of each month, quarter, and year, fund managers want their portfolios to look good. They sell or trim stocks that have lost them money and buy stocks that have done well. Even though fund managers’ overall portfolio performance won’t change much at these specific times, it is all about appearance–what’s on the books–to reassure investors that the people using their money are smart and making profitable choices. In the end, this strategy may work out for the fund managers, if the winners keep on winning, but it may fail as well and just hide poor decisions for a brief time.
For retail investors, it is good to know that this behavior may cause certain stocks to fall even further or rise even more–at least in the short term. If your money is in a fund, it is also a reminder to take a closer look at how well the fund manager is actually doing in order to avoid being lulled into a fake sense of security.
For retail traders, knowing about this behavior may be profitable. Study a stock or ETF and see if there is a pattern at these end points. If so, then, it may be worth either cutting losses beforehand, adding to winners, or waiting for the drop to buy low with the expectation of a short-term bounce.
While these patterns aren’t guaranteed to happen every time, they are good to keep in the back of our minds when a new month, quarter, and year come up.
What’s the difference between successful traders and investors and those that lose money? One important difference is that the ones who see green in their accounts typically follow some trading or investing strategy. It seems like there is no end to the number of strategies out there, and that’s a good thing because we are different people in different circumstances. A strategy that may work for one person may not work for another.
That is, you have a unique mentality, various emotional and physical strengths and weaknesses, particular times you are available to trade or invest, specific family and work obligations, certain financial resources and needs, a distinctive risk/reward level, and a limit to your desire and ability to study and understand the market. So, just like the rest of us, you have to figure yourself out in terms of what trading or investing strategy you like, feel comfortable with, and actually works for you.
You may want to search the internet for established strategies or you may want to experiment with devising your own, or you may want to use some combination of the two. The key point is to find a strategy that fits you and your life and then stick to it for as long as it consistently makes you more money than it loses.
When we have to make a decision, we often resort to our intuition–that gut feeling. And, in many cases, it’s a good idea to listen to that feeling, especially if we are already familiar with the situation or if we already know what makes us comfortable and happy. For instance, in his book Blink, Malcolm Gladwell discusses how people who make snap judgments about a doctor, whether the relationship will be productive or not, are often correct. People tend to know what they like or don’t like in relationships from years of interacting with others and so they intuitively know quite quickly if they will get along with a new doctor or not, even if they can’t articulate the reasons.
Employers often use their intuition when interviewing prospective employees, calling it their gut feeling about the person, and more often than not they are correct when it comes to a potential employee who is likely to make a good fit in terms of relationships. Yet, research finds that intuition is not a good decision-making tool for employers in terms of finding the employee who will do the best job. That quality is better achieved with objective measures. The reason is because our internalized and emotional biases our excluded from the decision-making process with objective measures–some pre-arranged set of criteria that reflects an ideal employee, for example.
When trading and investing in the stock market, it is tempting to use our intuition to decide to buy or sell a stock. We may feel like we intuitively know if the stock will go up or down–it’s that gut feeling we get. On occasion, we may even hear of some stock guru who uses their intuition to make very profitable trades or investments. Or, we may visit a community site of traders or investors and it looks like some of the best ones are using their gut feelings to make decisions. Perhaps, there are some people who are so familiar with the workings of the stock market that they can do that successfully.
But, the odds are that we are not those rarefied, few people.
If we want to consistently make money in the stock market, we need objective measures that tell us when to buy and sell. In this way, our emotions will be excluded from the decision-making process. Our criteria–if already tested for success–will not win every time, but they will make us money in the long. And, in the end, that’s the goal–to make money, not to have an emotional roller coaster of a ride, as fun as that might be.
Practice. In all other areas of life, especially the most difficult ones, we practice the skill before we engage in the real work. This is particularly noticeable in sports. Before the first game is played the players practice for months. If we think about professional sports, most players have practiced for years in some type of minor league–high school, college, or a farm system. No Olympian has won gold without thousands of hours of practice, hard, long, practice. In the vast majority of occupations, the top income earners have spent many years and much money learning the necessary skills in order to succeed on the job.
So, why would we think it would be any different with trading in the stock market? Why would we think we could read a few books and jump right in and make money?
The stock market is a difficult environment. Even professional money managers get it wrong sometimes. There are numerous factors that affect whether the whole market will go up, down, or sideways. And specific stocks may be influenced by even more factors, from unforeseeable global affairs to unknown internal company issues. Trading stocks successfully over a long period of time is consequently a skill that requires practice.
Before entering a trade with real money take the time to practice with your broker’s practice account. They will typically give you an electronic account with around $30,000 in it and the account works just like a real account. So, you can make trades in real time without the possibility of losing real money. Get your feet wet. Set goals. Find a strategy. Reign in your emotions. Learn to use technical analysis indicators and oscillators that work for you. And practice, practice, practice, over a long period of time to see how the market or specific stocks move, before you ever put your real, hard earned money at risk. Be the Olympian stock trader that wins gold, just after you’ve seen yourself make money consistently in practice.