Boost Your Profits With Simple Resolutions

It’s the beginning of the year. Traditionally, we resolve to do better each year.

Many resolutions are mundane promises to eat better, lose weight or save more money. Those are all important to do. But you should also resolve to make the most of your stock portfolio.

When Dr. Richard Thaler won the Nobel Prize in Economics last year, articles focused on his work to boost savings.

Thaler advocates enrolling employees into retirement plans by default. He found by making employees do something to opt out, like complete a form, most people simply do nothing and save for retirement.

Doing nothing is a powerful concept in growing wealth. It can even help you grow your wealth in 2018.

Trading and The Roller Coaster of Emotions

Resolve to do nothing for six months.

This year, resolve to trade your plan. Do nothing unless it’s part of your plan. That means first you need to plan.

Plan for the worst. Assume there will be a bear market. How would you trade that market?

For many investors, a long/short strategy might be best. This is a strategy that goes long buying stocks or call options to benefit from uptrends. The strategy also goes short, usually by buying put options, to benefit from downtrends.

Also, resolve to only accept as much risk as you truly can endure. If you take on too much risk, you won’t focus on the gains. Your emotions will follow the roller coaster pattern shown below.

(Source: Barclays)

Research shows investors act predictable when they get on that roller coaster of emotions. They buy in a state of exuberance at the top. They give up and abandon their plans in a state of despondency at the bottom.

Opportunity Costs

How can you avoid the roller coaster of emotions?

Think like a trader with your trading account. Many traders think like long-term investors. This is bad.

Long-term investors add to losing positions. They rationalize losses.

They might think of stock dividends as a silver lining when a position shows a loss. Or they hold losers because they tell themselves it’s only a paper loss until they sell.