| Of course, nobody likes to lose, especially when it comes to money. But that fear of loss overcomes our rational self and greatly decreases the probability of success. You see it happen in the sports world all the time. A team is up big and it begins playing "not to lose." Instead of continuing to do what got them into the winning position in the first place, they seize up. The fear of losing the lead, and the game, overcomes them. Sometimes they squeak by with a narrow win, other times they give up the lead entirely. Along those lines, you adhere to "prospect theory." Explain what that means. In investing, there's a human tendency to behave irrationally when it comes to taking profits and losses. According to Economics Nobel Prize winner Daniel Kahneman, this is known as prospect theory. One of the hardest things to do is keep your emotions from clouding your judgment. Once you allow emotions to get the better of you, you lose your confidence, self-doubt creeps in and you begin second-guessing yourself with every investment or move you make. Emotions make you question everything you're doing in the markets… especially during turbulent market environments as we're seeing now. Read This Story: How to Invest as The Traditional Order Crumbles A lot of factors are disrupting the status quo, including a norm-shattering election and a lethal global pandemic. Investors need to stay calm and stick to the fundamentals. How should investors behave when the next bout of volatility hits? Nobody likes to be wrong. And taking a loss is proving exactly that… that you were wrong. It's been proven that investors tend to sell their winners too early. It satisfies their desire to be right. They also hold on to their losers too long. After all, as long as you don't sell, you still haven't admitted that you were wrong. The simple fact is that we as investors will be wrong. It happens to the best of us. And chances are good that we'll be wrong quite often. But as prominent investing magnate George Soros once said, "It's not about being right or wrong, rather, it's about how much money you make when you're right and how much you don't lose when you're wrong." One of the simplest and most effective ways to protect your capital is through risk management. Establish strict sell or loss parameters and follow them. Watch This Video: 8 Steps to Preserve Wealth One popular risk management method is the 2% rule, which means you never put more than 2% of your account equity at risk in any single trade. For example, if you are trading a $50,000 account and you choose to use the 2% rule, that means you are willing to risk $1,000 on any given trade. The great thing about this rule is that if you stick to it, you would have to make dozens of consecutive 2% losing trades in order to literally go broke. And even for a novice investor, this is highly unlikely to happen. Keep in mind that the 2% number is arbitrary; you can adjust it to fit your level of risk tolerance. But it provides investors with a foundation on which to make trading decisions. Determining the proper position size before placing a trade will not only dramatically impact your trading results, but it will help put your mind at ease. If you can master the art of understanding losses and position sizing, you will be leaps and bounds ahead of other investors. To be sure, these are guidelines that can be, and should be, used by investors of all shapes and sizes. Plus, having a plan in place will help you sleep better at night during market drawdowns, knowing that you aren't taking extraordinary risks with your capital. Editor's Note: Jimmy Butts just outlined for us basic investing principles. Our mutual colleague Dr. Stephen Leeb understands these ideas better than anyone, which is why he's been guiding his subscribers to win after win in any market environment. | 
Tidak ada komentar:
Posting Komentar