Successful investing demands a cool head and the ability not to get ruffled, whatever the situation. Set yourself rules and stick to them, no matter what your heart is telling you.
A basic credo will serve you well, no matter what the markets are doing. This plan of action should always be adhered to, irrespective of market conditions.
Firstly, safeguard capital by diversifying assets. While diversification is not a fail-safe system and does not guarantee against loss, it is an important strategy that protects your money from uncertainties in unpredictable markets. The essence of diversification is to spread money over different asset classes: cash, stocks, bonds and alternative investments, where appropriate.
In the stocks class, make sure you have a mix of blue chip companies and mid-cap, and there is no harm in even having one or two small-cap companies. In the bonds class, select highly rated bonds. While alternative investments (hedge funds, etc) may not be right for everyone's portfolio, at least investigate this option with a professional financial advisor.
Secondly, know when to stop when it comes to stocks. When a stock is making a profit, don't hang on to it for ever. You might wait too long and the stock may suddenly plummet, ruining all your potential profits. Rather sell when you have made reasonable gains and move on to the next investment.
Conversely, don't hold on to a stock that is falling in the hope that soon it will turn around and begin to rise. Rather, sell as soon as it is evident that the downward spiral seems set to stay.
The trick is not to become emotionally involved, but to remain detached throughout the process. If you have a tendency to be swept away by euphoria or immobilised by despair, set yourself both upward and downward exit levels.
Thirdly, remain flexible up to a point. If you see that you have seriously misjudged a certain market trend, it's better to admit your mistake and take steps to curtail the damage. But if you're sure that your portfolio has been wisely constructed and you have confidence in its management, it may be better to ride out the trend - it might only be a temporary hiccup.
If you can suffer the short-term losses, hanging in for the long ride could ultimately give you greater gains. When in doubt, seek professional advice and don't be influenced by mass hysteria.
If you stick to these principles, you should be able to keep your emotions at bay and prevent them from interfering with wise-investment decisions.
Do not to be driven by fear or panic and do not be swept away by excitement. Keeping cool and calm will ensure that you collect in the long run.
l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail email@example.com