Defense is best offense

Many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks. Many buy-and-hold investors have unwittingly switched to a “buy-and-fold” strategy.

Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as CD’s and money market funds.

Market turbulence caused by signs that China is clamping down on credit to slow its economy, bank bashing by the White House, concerns over debt problems in some European countries and the recent pullback has investors on edge. A two-day rally this week left stocks down 1.1% in 2010.

Following the money trail highlights the shift toward defense. Since the start of 2008, when the worst financial crisis since the Great Depression began shredding paper wealth into confetti, stock funds have suffered outflows totaling $232 billion, Investment Company Institute statistics show. In contrast, fixed-income bond mutual funds have enjoyed inflows of $431 billion.

The love affair with bonds could end badly, says Brian Belski, chief investment strategist at Oppenheimer. In the 2000s, bonds outperformed stocks by a record 7.7 percentage points, on average, annually. The only other times bonds outpaced stocks for a full decade were the 1930s and 1970s. In both cases, stocks rebounded in the following decades, topping bonds by an average 10 percentage points a year.

Due to the shock and awe of the past 10 years, most people went to the safest assets they could find, and many are beginning to think now is a good time to move out of bonds into stocks.

The current lower demand for stocks, analysts say, could steal some of the cash ammunition the stock market needs to move higher.

Top 5 Mistakes Beginner Traders Make

1. Trading too often: Beginner traders often buy/sell their securities too much. They hear a hot tip on TV or a friend and feel they need to sell their current holdings and buy that stock instead. Generally, the only person who gets rich off of this is the investor’s broker, who rakes in trading fees. Trading frequently is also tax inefficient, since these investors often end up paying short-term capital gains tax instead of the lower long-term capital gains tax. Stock education as well as tax education is very important for stock market for basics maximum success.

2. Panicking: One emotion detrimental to investors is fear. Yes, you should use caution and prudence when making investments. However, panicking whenever the stock market goes down never solves anything. Investors that are quick to panic often end-up buying high and selling low.

3. Being Greedy: Jim Cramer frequently says “bulls make money, bears make money, hogs get slaughtered.”

4. Homerun Swings: Investors looking to find the next Microsoft generally focus on stocks with a high potential for growth. In a similar fashion to the value strategy, these investors seek to find stocks that they believe will grow faster than the market expects.

5. Poor Technical Analysis: Some people use charts to predict a stock’s movement. These traders are known as ‘chartists’ and this method of trading is known as technical analysis. Technical analysis tends to be used for short-term trades and if professionally traded will yield higher returns. This is why it is important to use technical analysis for momentum trading. Stocknod Automated Stock Alerts provide this much needed support via monthly subscription.  Technical stock analysis is an absolute for successful traders and now with Stocknod.com this critical technical homework can be provided to you via SMS or Emal alerts.

Take control of your finances with the technical stock alerts of Stocknod.com. Start trading with confidence and start trading with the Nod!