Using your RSP or 401K savings to invest in stock can be one of the most beneficial things you can do to build your wealth… but you need to learn to invest wisely. Did you know the average investor loses money? In fact, most research shows that up to 85% of individual investors lose money on a regular basis (that is, when all the trades are said an done, they are further behind than when they began). Today, I’m going to show you how to avoid being in that 85%… how to trade in the stock market and never lose a cent!
How to Trade in the Stock Market
When most people begin investing, they do something like this… After opening up an account, perhaps an RSP or 401K account, and funding it with some investment capital, they chose a stock. The process of selection can be as simple as a Google search of a company, a quick purview of the financial statements, and then the decision is made. But more often than not, the stock selection process begins by talking with a friend… someone who we perceive to know a little more than us. What we don’t realize is that often these friends are a part of the “85%” of losers! You’d never know it by talking with them… for they only flaunt their successes and never share their stories until after the trade is complete. Unfortunately, there is little thought given to when to buy or sell that stock… so most people just place the trade and watch….
Savings and Stocks
When you are learning how to trade stocks, it is critical you remember this primary principle: Capital Preservation! This doesn’t mean we bury our money under our mattress… after all, even inflation will eat away at buried money. Instead, it means that we take steps to protect our investment capital… our savings that we worked so hard for by minimizing our risk and maximizing our returns. We develop a strategy to do protect our savings while allowing us to invest in stocks.
How to Trade in Stocks
The issue becomes, “how will you know if your approach is going to protect your capital and put profits in your pockets until you make the trade?” Here’s how I do it… Sit down with a piece of paper and pencil (or use a spreadsheet for easier calculations) and test your theory. I suggest you use both a random approach (choosing several months in a row over several years) and a systematic approach (carefully watch how your strategy would have worked in previous market corrections and bull markets). The random approach ensures you remain somewhat objective… while the systematic approach tests your theory against some of the worst, and best, market conditions which will reveal how it will stand up in similar markets in the future.
Until you’ve paper traded your investment strategy, you shouldn’t invest in stocks
For example, when I developed my Weekend Investor Strategy, I spent months testing how individual stocks would react to the “rules” of my theory. I looked at weekly charts of both random and specific stocks over both random and specific time periods, making note of where the rules of my theory would have compelled me to buy and sell. Then, I took that data and looked for the areas where I consistently would have lost and/or made money and asked the question, “why.” Finally, I made minor alterations to the rules and retested the exact same scenarios to see if the outcome would be better based on the tweaks. Last year (2010), when I traded using this strategy, I had a 91% accuracy rate… which was the proof that all the “paper trading” was worth while. You see, I work hard for my money… as I’m sure you do. And I’m extremely “frugal” so, the last thing I want to do is “hope” for the best. There’s a lot of very smart people out there checking the charts, reading the financials, looking at the balance sheets, and consulting the latest online reviews… yet, despite all of these efforts, they are still losing money.
The best stocks to invest in are the ones where you are alb to protect your capital by minimizing your losses while maximizing your returns. The longer the timeframe (i.e. look at your stocks once a week versus once a year), the more possibility you will lose money. It only makes sense… if you look at your stocks once a year, so much could have happened… and it may be near worthless by the time you review your holdings. However, if you look once a week, you can respond quicker to the stock’s movement and make the necessary changes.
I’ve been developing the Evening Investor Strategy… and I’ve just gone public with it a few weeks ago. For several months, I’ve been paper testing the ideas… trading on my spreadsheet, investing every day… and never losing a cent. Now, I’ve launched the 5 for 5 Guarantee… a public display in real-time of how this strategy works. I’d encourage you to check it out while it is still free to access.
Do you invest in your strategy before trading your savings?
As I stated earlier, using your RSP or 401K savings to invest in stock can be one of the most beneficial things you can do to build your wealth… but you need to learn to invest wisely.