There is an old saying on Wall Street, that everyone is a genius in a bull market. Why? Because, nearly everyone is making money when the market goes straight up and when that happens, you invariable feel like a genius. The problem is that feeling changes (very quickly) when the market declines. To help smooth out the playing field, here are three timeless lessons to keep in mind.
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1. Know Yourself
Another step, to being successful in the market (and in life) is to know yourself and know what makes you tick (pun intended). If you are good at the big picture, but not good at minute details, you may want to consider a longer-term investment plan and not focus too much on every tick in the market. Conversely, if you are very good at details and prefer the short-term you might want to find an approach that matches your strengths. In any event, developing a sound plan ahead of time is a great way of getting ahead in the market. This way when the market declines, you have a plan, and you can trade your plan.
2. Set Realistic Expectations
The next step is to define your time-frame and set realistic expectations for the market. It’s important to understand that the market goes up, down, and sideways. It doesn’t always go up. That may be hard to believe for anyone who started trading over the last several years, or in 2019. Once you understand that the market can move up, down, or sideways and set realistic expectations you will be prepared for when the market declines, instead of doing what most people do and panic when the market declines.
3. Cash Is A Position:
Remember, cash is a position and you are free to hold as much (or as little) cash in your portfolio as you want. There is no magical “rule” that says you must be 100% invested at all times. Raising cash and waiting for attractive risk/reward entry points is a great way to achieve long term success on Wall Street. I spoke to Guotao Lu, Principal and Portfolio Manager, at Greiphyn Heights Asset Management, a hedge fund manager in New Jersey, and he told me, “It is of the utmost importance to be comfortable with your exposure in the market at any given time. If, at anytime, you are not comfortable with your exposure in the market, just raise cash. At the end of the day, cash is a position and it is important for you to remember that patience is a virtue—and it pays excellent dividends.”
These are just a few nuggets of wisdom that may help you navigate the market gracefully. There are many more but it’s always good to start with knowing yourself, setting realistic expectations, and being patient until you find attractive risk-adjusted entry points.