The Secret to Success? Knowing Yourself (3 Investing Styles Included Inside)
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Now, I checked out my fair share of VHS tapes for movie nights with my wife, and I dipped my toe into the low-carb craze. But I refused to follow the last trend by buying into the flashy tech stocks of the time.
A lot of my clients were not happy about that.
They all desperately wanted me to pump up their portfolios with the hot internet stocks, whose price tags far surpassed their fundamental value. When I stood firm on my position that these were stocks to avoid, not to buy by the armful, some of these clients closed their accounts with me.
But not long after, steering clear of stocks like eToys.com, Egghead Software, and Kozmo.com turned out to be the right move.
Don’t recognize these companies?
That’s because they all crashed and burned when the dot-com bubble burst in 2001.
Sticking to my guns instead of leaping into the latest trend saved both me and my clients a lot of pain.
With everything going on in the world today, knowing who you are as an investor is more important than ever, which is why I want to help you determine what type of investor you are.
This involves taking a few factors into account: your financial situation, your appetite for risk, and your personal goals.
I first shared this advice with the paid-up members of the Stock Advantage Report, but I feel it’s so important that I wanted to make sure everyone now has access to it.
To help you figure out what investing style may work best for you, I’ve outlined three basic investor types below and how each type can use the tools of TradeSmith to best reach their financial goals.
Investor Profile No. 1: The Conservative InvestorThe conservative investor approaches the markets cautiously and methodically. A conservative investor can range from being a mature investor who is nearing retirement and wants to preserve what they have to a beginner investor who’s testing their wings for the first time.
Preferring peace of mind over eye-popping profits, they tend to gravitate toward stocks of established, dependable businesses rather than the new shiny thing and all the volatility that comes with it. They’re looking for stocks that they’re comfortable sitting on for the long term, ones that can provide slow, steady growth.
It’s the “tortoise versus the hare” approach to investing.
TradeSmith Signals to FollowTo find these steady, dependable stocks, conservative investors may want to target stocks with low- to medium-risk Volatility Quotients (VQs), in other words, VQs below 30%. This will help them steer clear of stocks that are vulnerable to dramatic swings in price.
Additionally, conservative investors should stick to stocks in the Health Indicator Green Zone. This ensures that they’re adding only the healthiest stocks to their portfolios.
If they find that they own several stocks that are already in the Red Zone, they might consider letting these positions go and waiting for a new Entry Signal to trigger before buying back in.
Yellow Zone positions are all right to hang on to, but they should be monitored. Remember, positions in the Yellow Zone are still moving within their normal VQ range, but they’ve pulled back past the halfway point between their most recent high closing price and the Health Indicator stop loss price.
Investor Profile No. 2: The Moderate InvestorThe portfolios of a moderate investor strike a balance between stocks they consider to be “safe bets” and stocks that are more risky — but potentially more lucrative.
They have some free cash to play with and are willing to take some calculated risks, but they’re hesitant to be the first one to buy into an opportunity; they’d rather wait for more aggressive investors to make their moves and see how things shake out before putting their own money on the line.
It’s the “best of both worlds” approach to investing.
TradeSmith Signals to FollowBecause moderate investors are open to facing higher levels of risk, they have a greater array of options available to them than conservative investors. Though they might hold a few positions with low-risk VQs for some stability, they would likely be better served by choosing medium-risk and possibly even a few high-risk positions to pursue the gains they’re looking for. (For reference, medium- and high-risk VQs fall between 15% and 50%.)
This is because there’s always a give-and-take when it comes to risk and reward: If you want greater potential for reward, you’ll have to withstand greater volatility to get it. Just how much volatility you’re comfortable withstanding is a personal call.
Like conservative investors, moderate investors would do well to stick with Green Zone and Yellow Zone stocks. It’s best to avoid the Red Zone, but investors who skew closer to the aggressive end of the scale may be interested in following the Early Entry Signal that can appear in Red Zone stocks, which is described below.
Investor Profile No. 3: The Aggressive InvestorThe aggressive investor isn’t afraid to weather periods of uncertainty and wild fluctuations in stock prices. They’re willing to swing big and take chances on speculative plays — their goal is to build wealth, and to not waste time in doing so.
To accomplish that, they may trade on a regular basis rather than taking a buy-and-hold approach. The slow, steady stream of gains that would be satisfactory to a conservative investor is not the aggressive investor’s end game.
But there’s a difference between being bold and being reckless.
A smart aggressive investor analyzes the fundamentals of a business and makes sure that the stock they have their eye on isn’t wildly overvalued — they don’t just buy into whatever stock is getting hyped up by the headlines. And they never put money on the line that they can’t afford to lose.
This is the “home-run hitter” approach to investing.
TradeSmith Signals to FollowAggressive investors can foray into riskier territory that would be considered out-of-bounds to the other types of investors. This means their positions can run the gamut of VQ values — including sky-high-risk stocks, which have VQs greater than 50%.
But before buying into one of these loose-cannon stocks, they should carefully consider their reasons for doing so. They should only make a move if they have a firm sense of conviction in the strength of the business (and the data to back up their opinions).
As far as the Health Indicator goes, Green Zone stocks are always preferable. But even Red Zone stocks aren’t off-limits to aggressive investors.
The Early Entry Signal (available to members with TradeStops Plus and above) triggers when a Red Zone stock shows signs of an uptrend, and investors who want to be the first ones to the party can follow this indicator if they’re confident that the stock will continue to rise.
SummaryNo matter which category of investor you most identify with, the Volatility Quotient and the Health Indicator can serve as excellent guides to finding the opportunities that best suit your risk tolerance, financial situation, and wealth-building goals.
To learn more about any of these indicators, we have a special Bootcamp webinar that breaks them all down in detail.
You can access the webinar by clicking the play button on the image below.
You can also access a PDF version of the webinar here.