Have you ever heard of the philosophy…”Control the Controllables”… It’s very common among sports stars and sport psychologists. And it’s something you can apply as an investor.
What it means is simply that a sportsperson has a better chance of succeeding if they try and ignore factors outside of their control such as their opponent’s skills, the weather, and the crowd noise. Instead, they should focus on what they can control: their own game, attitude, mental approach and more.
You can apply the same thinking when you invest.
As much as we all would like to, we can’t control…
Where the prices of assets will go…And thus, the returns we make.
Which way the economy will go…
Inflation and interest rates…
Geopolitical issues such as wars.
However, there a few things you can control and doing so, can make you a better, more profitable investor.
The four factors you can control as an investor…
#1: Risk:
When investing in stocks, paying a higher price will likely lead to less profits. On the other hand, buying a stock at a reasonable price or at a discount gives you a higher chance of generating higher profits.
Valuations matter and have a large impact on what reasonable returns can be expected. Of course, this does not guarantee those results, but it does provide some important clues.
For example, if there are two banking stocks – one on a price-to-earnings ratio (PE) of 30 and the other on a PE of 10…all things equal, it’s more likely the bank stock on a PE of 10 that will outperform the one on a higher PE.
Risk doesn’t only have to do with fundamentals. It also includes things like position sizing – what percentage of your portfolio is allocated to a single share…
Are you comfortable with taking a 20%, 30%, even 50% knock on a share. These are risk factors you must consider before buying.
Also if a share rises a lot, you can always sell a portion of your position. This will ensure you get back to the original position size.
#2: Costs:
The costs you pay for buying a share or an ETF can impact your overall return.
You want to keep costs low. Consider how much you have to invest, your minimum broker rates and monthly/yearly fees. The ‘later’ is especially important when investing in funds that can cost upwards of 1%, even 2% in yearly fees.
While a 1% fee doesn’t sound like a lot, it can add up over years and ultimately take a huge chunk out of your returns.
Fortunately, today there are several low-cost brokers you can use to minimise the costs you pay.
#3: Time:
How long are you planning to invest for?
If you’re a long-term investor, a drop of 10%, 20% even higher in an investment shouldn’t really worry you that much.
We know that throughout stock market history, there have been crashes, recessions and bear markets. That’s the nature of market cycles.
Eventually, markets will bottom and rebound. And a new bull market will kick in. Trying to time market rebounds and crashes is a fool’s errand. And ultimately, you can lose a lot of money doing so.
Remember, “TIME-IN” the markets accounts for 90% of the returns you make.
A study of the S&P500 from the end of 1986 to the end of 2020 showed it generated total returns of around 3,196%. But if you missed the top 10 trading days over this period you would only be up 1,372%.
That means, on a $10,000 investment, you would’ve missed out on a $180,240 windfall.
What’s more, many of these top 10 days (including two in 2020) occurred when investor sentiment was negative.
Simply put – trying to time when to be in or out of the markets is very difficult and can be extremely costly.
#4: Behaviour:
While it’s extremely hard, you can control how you act when investing.
Always set yourself some rules when investing. And stick to them.
It could be as simple as deciding when to check your portfolio. Sitting and watching the markets all day will just give you anxiety and stress. And then, you’re more likely to act on impulse.
Rather have a set investment strategy or criteria you follow when buying a share, ETF, bond or any other asset. And stick to it.
That way, you won’t buy because of greed. And you won’t sell because of fear.
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