The Most Common Portfolio Mistake

12/09/2011 1:30 pm EST

Focus: STRATEGIES

John Thomas

Author, Diary of a Mad Hedge Fund Trader

New and experienced investors share one common problem that causes big drops in their portfolios, explains John Thomas. The good news is that it is rather easy to identify and correct.

Investors always want to avoid making mistakes. We’re talking today with John Thomas, and John, you mentor investors; what are some of the most common errors you see?

I’ll tell you the classic retail mistake, and that is that someone will get a recommendation, a piece of research, and they don’t act on it immediately. They sit and watch. 

They watch it go up and up and up, and they say “Wow, this is working,” and a month later, they buy and it drops like a rock.

In a market that has no long-term trend to it—and we have had no long-term trend in US stocks for ten years or 12 years—that doesn’t work. 

You have to get in quickly; you have to get out when you have a good profit. There was a time where you could buy things up 10% and then they would go up another 10%, 20%, or 30%, but that was the 90s. That’s when the Dow was going from 2000 to 10,000. That is not now.

Now, you have to trade or die. That is the mistake I see individuals committing the most. It is the one I try to dissuade them from the most; sometimes successfully, sometimes not so much.

What do you think is the psychology behind wanting to wait?

It’s the old greed and fear situation. People are afraid of losing money. They hold back, and then they get greedy and say “Hey, I’ve got to get on this because it’s working,” and that’s exactly the wrong time to do it. 

It’s basic human nature, really. Part of becoming a successful hedge fund trader is you have to overcome natural instincts in human nature to do it. To some extent, making money in the markets is an unnatural act.

How to you coach people on the right time to sell and take their profits?

Well, in my own service, we send out trade alerts via E-mail and Twitter. People immediately get signals on when to buy and sell. People who act on those quickly tend to make money and do well. People who just watch them and wait a month tend to do less well.

Are they technical signals you’re looking for or fundamental news items?

I am looking at a minestrone soup of all of the above. When the technicals line up, the fundamentals line up, and you get a good news headline for a trigger, that’s when we do a trade. 

Any one of those independently won’t make you money anymore. You’ve got to use all the tools in order to bring in a good return.

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