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16 Ways to Play the Markets Like a Pro

Written By Brian Hicks

Posted September 10, 2011

You call yourself a serious investor and you can “booyah” with the best of them…

But I have my doubts.

If you’re like most retail investors, you buy at the top; you sell at the bottom; and you take on way too much risk.

And every time you set foot, you’re in the water.

The pros are there, too — waiting to grab a chunk of your retirement money. What they have in spades is something you completely lack…

It’s called experience and it’s worth its weight in gold.

It’s what keeps in them the game for the long haul while you get washed out with the tide.

That being said, here’s what I’ve learned in over 25 years of watching the bulls and the bears battle it out. (And some lessons, I’m sorry to say, were learned the hard way.)

16 Ways to Play the Market Like Pro

1. Ignore the news. Warren Buffett doesn’t bother watching CNBC, so why should you? The financial news, after all, isn’t any different than your own 6 o’clock news. If it bleeds, it leads. The smart investor ignores the shrieks of financial press while sticking to his own due diligence.

2. Understand your risk of ruin. As every gambler knows, the risk of ruin refers to the possibility that a string of losses will wipe them out entirely. That, of course, is completely unacceptable, since those chips are their ticket to the game. It’s really no different on Wall Street… And that means you need to protect your principal. After all, it’s your ticket to the game. Defend it at all times.

3. Diversify your risks. Big bets can make you — but don’t let them break you. Instead, it’s better to spread your risk across several different stocks; that will allow you to avoid the big draw-downs that can easily come from losing one large bet on a single company. Proper asset allocation is the key.

4. Build your core positions around dividend stocks. Even in bear markets, dividend-paying stocks typically do well — especially if those companies have a strong history of increasing the dividend payout. This allows you to build wealth over time, as long as you pick companies with a minimal risk of a dividend cut. These stocks create your “safety-net” in volatile markets.

5. Reinvest your dividends. When an investor receives dividends, he has two choices: The first is to take the cash and spend it. The second is to immediately take those funds and purchase more stock. The smart investor chooses the latter. Dividend reinvestment programs are an automatic way to build wealth.

6. Remember the Rule of 72. Compounding is one of the powerful forces known to man — and it’s where the Rule of 72 comes in. The Rule of 72 maintains that to find the number of years it takes for to you double your money at a given rate, you just divide the interest rate into 72…

For example, if you want to know how long it will take you to turn $12,857 into $25,714 at 9%, you would divide 72 by 9 and get 8 years. But what if you actually saved $12,857 a year at 9% interest for a period of 24 years? How much would you have then? The answer is about $1,076,154 — not bad. Smart investors understand that compounding is the key to a fool-proof retirement program.

7. Always ease into new positions. Successful long-term investors understand the value of dollar cost averaging. This approach spreads out those stock purchases, lessening the risk that you will buy them at “the wrong time.” That way, you arrive at an average price that, more often than not, better reflects the true value of those shares.

8. Have a plan and act on it. This one is easier said than done. But the truth is when a position goes awry, it is always best to have a stop-loss plan in place; this keeps losses from becoming even bigger. After all, it’s not about being right — it’s about making money.

9. Be content to take a single. Sure, homeruns are exiting… but a string of singles is just as good. Building true wealth takes time, but it’s completely achievable. For instance, did you know that a 25-year-old could turn a $3,000-a-year investment into $1 million dollars in 40 years with only a 10% average annual return? Anyone can — and the smart ones do.

10. Become a technician. This maybe a heresy to fundamental investors, but it’s true: You ignore technical analysis at your own peril. Because while P/Es and book values definitely have their place, technical analysis is equally important to volume, price action, and chart patterns. After all, markets — just like people — repeat themselves.

11. Recognize support and resistance. Never chase stocks, no matter how tempting they may be. Instead, wait until the market falls back to a known level of price support before you buy. Spotting these levels is often the difference between a winning and a losing trade. Remember, no stock ever goes straight up.

12. Keep your eye on the VIX. The “fear gauge” tells you whether or not the markets have reached an extreme bullish or bearish position. If so, that tends to be a sure sign that the markets are about to stage a reversal. As usual, “the crowd” hardly ever gets it right. (So much for the rational market theory.) The smart money simply uses the VIX indicator as a sign to bet against them all.

13. Nothing lasts forever. As bad as it may seem at times, today’s bear market will eventually run its course… After all, every bull market begins when all seems lost. Conversely, bear markets typically begin at the height of the party. The smart money knows the difference.

14. Buy when the markets correct. Warren Buffett said it best: “Be greedy when others are fearful.” But for some reason, retail investors just seem to hate sales. So they buy high and sell low — not exactly a winning strategy. Market corrections may be scary, but that’s the time when stocks have fallen into the bargain bin.

15. All stocks can be risky. This one should be obvious, and if you haven’t learned it by now, odds are you never will. The simple truth is that every time you purchase a stock, it can and will go down. It doesn’t matter whether it’s Apple Inc. (NYSE: AAPL) or Exxon Mobil (NYSE: XOM); every new investment carries with it the risk of downside. How you manage those risks is the key to game. It all boils down to risk/reward.

16. There’s always a bull market somewhere. Even in bear markets, there’s always something to buy. If it isn’t in stocks, it’s in bonds, commodities, or even real estate… Smart investors are flexible and follow the trends.

Our editors have put together a few of their best money-making ideas for the coming years in this week’s top-read articles from Wealth Daily and Energy and Capital. You can find those below.

Have a great weekend.

Your bargain-hunting analyst,

 Steve Christ Signature

Steve Christ
Editor, Wealth Daily

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