The Anatomy of a Trader, Part 5 of 5: Fancy Footwork

By Andrew Nyquist
Throughout life, we often hear loved ones or motivational speakers tell us to “stay grounded,” and to “keep both feet on the ground.”  And although it’s a bit cliché, it’s true with a lot of things in life.  With investing, it rings especially true, for if you lean too long or too short or too hard on one stock or type of investment, you’re bound to find trouble.  We all know that feeling.  It’s like “damn, if I wasn’t so dependent on one investment or one line of thinking, my trading P & L would look a lot healthier today.”

But the trouble with offering up a blanket “balance” solution and a bunch of clichés is that they don’t apply to all types of investors.  Primarily, you have to know if you are a short term or long term investor (in general, or for that investment)?  Athough some of the balance rules overlap, each style of investor has a slightly different focus.  The rules don’t always have to be followed to a “t” but just understand that when you roll the dice, they may come up snake eyes.

So here are 4 rules to help both Short Term and Long Term investors keep their balance:

Balance Rule #1:  For Short and Long Term Investors

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Be measured in how much capital you decide to allocate to any one stock, sector, or type of fund.  Conviction can get the best of you, so know when to say when.  If you have over 60 percent of your portfolio in any one stock, for instance, you’re rolling the dice.  Likewise, if you are more than 50 percent invested in any one sector or fund, you’re likely asking for trouble.  Each of us has a different risk profile, but we all know when that “gambling-type” feeling creeps in.  Hint: It’s usually when we’ve pushed our investment too far. 

Note as well that index funds (ETF’s) are a cheap way of staying diversified for both long and short term investors. Example include the S&P 500 index fund (SPY), Dow Jones Industrials index fund (DIA), and Nasdaq 100 index fund (NDX).

Balance Rule #2:  For Short and Long Term Investors

Keep an open mind when choosing your investments and strategy.  Do your research and follow professionals that think freely and don’t always follow what the media is saying.  If the mainstream media is telling you to buy “x” stock or sector, be skeptical and do your own research.  It is during times when the “herd” is cheering that Mom and Pops investors tend to join in the fun… only to find that their market timing skills aren’t quite as good as they thought.

Balance Rule #3:  For Short Term Investors

After getting your fill on any one investment, be sure to trim your position as you reach into profitability land.  It’s good risk management.  Just as you averaged in on the way down, you should average out on the way up.  And be sure to use stops to mitigate downside risk, especially after you get your fill (because you carry the most risk at an averaged- in full investment).

Balance Rule #4:  For Long Term Investors

Similar to short termers, as a long term investor you should be averaging into your desired long positions.  Be sure to set target goals for getting into and out of your investments (and update frequently).  Although this is over a longer term horizon, you still want to stay involved and on top of your investments; money is money, and if you’re up 50%+, you may want to trim some of that long term position.  And if you sell out of a position completely, be sure to set a reallocation plan in motion.

Now these are just a few investing rules to keep in mind.  If you want to become a more complete investor/trader, be sure to read the rest of The Anatomy of a Trader five part series.

Happy New Year to all!

***Find the entire The Anatomy of a Trader series here.


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No positions in any of the securities mentioned at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.