When buying a fund or stock, make sure you know whether the activity is a trade or an investment. Typically trades are seen as having a short time span; a day, a week, or a few months. Investments have a longer time span; a year or years.
Why is this topic important? It is important because investors sometimes end up with stocks that were trades, but now are being looked at as investments. This occurs not because the nature of the company/stock actually changed, but because the assumptions around the trade did not pan out. Rather than getting out of the stock, they settle in with the stock. This is a bad way to manage an investment portfolio.
To be a successful investor, it is important to have clear goals and expectations when entering into a trade or an investment. How do the characteristics of X stock mesh with my investment goals?
When you buy a stock to as a trade, you are expecting a certain price movement over a sort and specific time frame. If this does not occur, then you need to move out of the position. Unless news breaks that significantly alters the company’s course for the better, stick to your plan. Do now allow a trade to become an investment if such status is unwarranted.
Conversely, it is not wise to begin to treat an investment like a trade. This means if you’ve identified a stock/fund to be held in your portfolio for a year or more, do not go off and start selling at the sight of significant upward movement in the stock’s price.
The bottom line is to have a plan for each trade and investment you make. If new information is not present to justify changing a trade to an investment or vice versa, then do not give into the tendency to change your game plan for unfounded reasons. It may feel good to your psyche, but it is likely not to bode well for your portfolio’s value.