Beginning any new venture with CMC Markets can be a a bit frightening at times. After all, there is always the chance that you will fail. Learning the “nuts and bolts” of investing is no different in this respect. However, preparation will often determine whether or not you will enjoy success over time. How can you supersede any inherent fears? Are there any methods that will help to mitigate the risks that you take and how can these be applied in day-to-day trading? These are all very rational questions and in order to appreciate their significance, let’s address each one in more detail below.
Gaining the Psychological Edge
The majority of fear in relation to any type of investment revolves around the concept of “what if”. In other words, what would happen if you lose all of your finances? What if that chosen stock within your portfolio fails to perform? What if you do not have the acumen required to make the best decision at the most opportune time? It is important to realise that while these are completely rational questions, allowing them to take too much precedence over your strategy will inevitably hamper your abilities. Remember that while mistakes and losses will inevitably occur, these are all part of the learning curve.
The Benefits of a Stable Base
Being able to implement a strong trading foundation will do much to lessen your fears about taking more risky ventures in the future. This is why the centre of your portfolio should always contain a number of blue-chip stocks that have been known to perform well. Let us look at a quick example.
Imagine that you had invested a stake in the company Apple exactly one year ago. According to the latest figures, your price return would have been 51.86 per cent (1). This is important for two reasons. First, the sheer profit margins associated with such an investment are without a doubt impressive. However, let’s also not fail to mention that these returns could very well serve to offset any losses that may have taken place within other sectors such as currency trades or CFDs. It is impossible to eliminate all risks. Still, this is an excellent method to dramatically reduce the impact that a negative movement will have upon your portfolio.
The fear of losing a substantial amount of money is likely your most formidable opponent when learning how to invest. So, it only stands to reason that smaller ventures will be easier to manage. Take a conservative edge when starting out. A good way to approach this concept is to set thresholds in regards to how much you will allocate into any specific investment.
This same type of benchmark should be set on a weekly and a monthly basis; regardless of your profit or loss margins. As you become more comfortable with your trading methodology, these limits can naturally be lifted over time.
Diversification: Spreading the Wealth While Reducing the Fear
Try to imagine the amount of stress associated with following the price of a single asset on a daily basis. By only focusing upon one holding, you will naturally be subject to higher levels of fear and hesitance. This is why novices and experts alike seek to diversify their portfolios based upon the levels of risk associated with different holdings. A good example of one which can provide you with a greater amount of stability can be seen below:
- 50 per cent blue-chip stocks (low risk).
- 25 per cent commodities (low to medium risk).
- 20 per cent binary trades (medium risk).
- 10 per cent Forex positions (high risk).
As we can see, those positions associated with a greater risk comprise less of a percentage of the total portfolio. This conservative stance is a great way to learn the proverbial ropes before focusing upon more liquid positions.
There is nothing wrong with feeling a bit of fear when investing. In fact, it is a necessary instinct to prevent you from making rash decisions. Controlling this emotion is nonetheless important if you hope to enjoy success within such a changeable environment.