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Why Chasing Returns is a Bad Idea

According to Investopedia, “investment is an asset that is purchased with the hope that it will generate income or will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth”. So the very nature of investing is to expect a good or satisfying return. I have never met a person who has invested his money and never expect a return.

Nowadays, with so much noise of basura stocks and other top-gainers that are getting noticeable each day, many Filipinos have gone interested in putting their money in.

 

Is it wise to go all-in?

 

I have spoken to many people for the past few days and others were even telling me that they have already invested most of their money all-in on these stocks. The problem is, they are just new in investing and they have only made their decision based on misleading news, or if not it is coming from a person who might just be hyping the stock.

 

By the way, hyping is very common in the stock market and many people have already turned their backs from the stock market because they’ve lost huge money. For those who gambled in the market, they have already met their fateful end. As a matter of fact, I haven’t seen those people who have treated Stock Market that way. 

 

So what is wrong with chasing returns?

 

Chasing investment returns refers to switching from an average performing stock into one that has an excellent recent return (high-flyer).  There are a few problems with this investment strategy:

 

1. “Hot” stocks don’t usually stay hot.  In fact they usually come crashing back to earth shortly after you buy them.

2. Stocks that aren’t doing well can make a comeback.  If you sell them too soon, you might miss out on any recovery.

 

There is nothing wrong with buying and selling stocks if you have a solid trading plan and make your buys and sells based on that plan.  The worst type of trading is to buy stocks after they have gone way-up and then sell them after they have dropped.  This is also known as “buying on greed” and “selling on fear“.

 

Chasing High-flyers

 

Risk management is still very important and it is something to take very seriously. If you don’t know how to set-up a stop loss and a trailing stop while trading a third-liner or a penny stock such as PHA, MRC, PHR, EURO, and NOW, it is a matter of time that you will experience big losses (if you are not careful).

The reason why there are people who are still trading stocks until today is that they keep the discipline of following their own trading strategy. Make sure that you are not just after the return but on improving your trading and investing skills, which in turn can give you a consistent return. That is the art of trading! 

A piece of simple advice, learn to test a combination of indicators and price action analysis so that you would know when is the proper time to buy and sell stocks; such as support and resistance, basic candlestick patterns, RSI, MACD, and Moving average.

Using Technical Analysis would keep you from the danger of big losses on the fear of missing out (FOMO). Some people hopped-in to a trending stock on pure speculation (wild guess) only to find out that after buying, a sell-off happened. I don’t want you to go that route.

 

Kapayaman, Do you want to learn more about Stock Market investing and trading? You can access our digital courses:

 

Payaman sa Stock Market 101

Stock Trading From Scratch (Taglish Technical Analysis)

Stock Market Investing Learning Essentials

 

November 24, 2020

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