Too Scared to Trade

Have you ever felt to scared to trade?

This stock trading question comes from Gregory L. who asks…

“My #1 challenge is ‘pulling the trigger’, i.e. executing the trade. I guess I am still damaged by the GFC losses.”

Many novice investors narrow their stock pool by over-strategizing, i.e. trying to pick the right stock, the right sector, measuring earnings, watching management, plotting social trends and whatever else they feel is necessary to beat the market. But quite often, the focus on these little things takes precedence over understanding the big picture.

The big picture is this: be fully invested when the market is rising, and take defensive action when it’s falling. Nothing more. Nothing less.

During the GFC almost every investor did the exact opposite; remained invested as the market fell (hope), and by 2009 were so shell-shocked they could not possibly think about buying shares. They sat on the side lines as prices shot higher (fear).

So the “challenge of pulling the trigger”, the fear, stems from not having a defensive mechanism in place to remove the possibility of large losses should another GFC-style event occur. If you have a defensive mechanism, that is, you know how, when and why you’ll exit positions, then there is actually nothing to fear. You will exit. You will not suffer those significant losses. You will defer to cash. You will become more at ease. Psychologically and financially you will be in a better position to enter the market again when the time is right.

Growth Portfolio

Which is exactly how our Growth Portfolio operates. It extracted clients from the market in July 2008, sitting 100% in cash through to February 2009. The Growth Portfolio then started investing again and reaped the rewards of the big run higher from March 2009 onwards. It was not because we were smart or predicted what was going to happen. It was simply because our pre-defined rules told us that it was time to take leave and then time to jump back in.

Is it perfect? No, of course not.

But here’s the thing. It doesn’t need to be perfect. The rules just need to be aligned with the bigger picture; be fully invested when the market is rising, and take defensive action when its falling.