Four Major Financial-Market Anxieties:
If it’s up, you worry you didn’t buy.
If you bought, you worry it won’t go up.
If it’s down, you worry you didn’t sell.
If you sold, you worry it won’t go down.
How to deal with it?
1. Set expectations:
Write down the most ideal outcome you believe. For example, you expect a certain stock to rise by 50% from its current price in the best-case scenario. On a blank sheet of paper, write: Expected increase 50%.
2. Set a bottom line:
Write down the maximum percentage loss you can tolerate. For example, your maximum acceptable loss for this investment is -8% from the stock price falling below your purchase cost. On a blank sheet of paper, write: Bottom-line loss -8%.
* Research shows that losses on a single stock of no more than -8% are the key to keeping your investment portfolio healthy.
3. Calculate the reward-to-risk ratio:
Reward-to-risk ratio = Expected ÷ Bottom line. For example, if the expectation is a 50% rise, and the bottom line is a -8% loss, then the reward-to-risk ratio = (50 ÷ 8) = 6.25x. On a blank sheet of paper, write: Reward-to-risk ratio = 6.25x.
* In general, a reward-to-risk ratio of over 3x is worth doing.
4. Make a plan:
- If it reaches the expectation, take profit;
- If it doesn’t reach the expectation and hasn’t broken the bottom line, hold;
- If it hits the bottom line, cut losses.
With expectations, a bottom line, and a plan,
most important is to act according to the plan. For every investment, follow this process, and you’ll no longer be anxious.
If it’s up, you worry you didn’t buy.
If you bought, you worry it won’t go up.
If it’s down, you worry you didn’t sell.
If you sold, you worry it won’t go down.
How to deal with it?
1. Set expectations:
Write down the most ideal outcome you believe. For example, you expect a certain stock to rise by 50% from its current price in the best-case scenario. On a blank sheet of paper, write: Expected increase 50%.
2. Set a bottom line:
Write down the maximum percentage loss you can tolerate. For example, your maximum acceptable loss for this investment is -8% from the stock price falling below your purchase cost. On a blank sheet of paper, write: Bottom-line loss -8%.
* Research shows that losses on a single stock of no more than -8% are the key to keeping your investment portfolio healthy.
3. Calculate the reward-to-risk ratio:
Reward-to-risk ratio = Expected ÷ Bottom line. For example, if the expectation is a 50% rise, and the bottom line is a -8% loss, then the reward-to-risk ratio = (50 ÷ 8) = 6.25x. On a blank sheet of paper, write: Reward-to-risk ratio = 6.25x.
* In general, a reward-to-risk ratio of over 3x is worth doing.
4. Make a plan:
- If it reaches the expectation, take profit;
- If it doesn’t reach the expectation and hasn’t broken the bottom line, hold;
- If it hits the bottom line, cut losses.
With expectations, a bottom line, and a plan,
most important is to act according to the plan. For every investment, follow this process, and you’ll no longer be anxious.