Summary #7: You should keep a close eye on the general market direction.
Individual stocks only matter up to a point. If the market goes down, you'll lose money.
Just think back to the crash of 2008. For the most part, it didn't matter how good your stock-picking was. If you didn't sell in time, you lost money. The truth is, three out of four stocks will lose value if the general market is heading downward.
In my mind, this kind of reinforces a recent decision I made (as recorded in another thread) to only purchase stocks as the major U.S. indices are coming out of pullbacks...
Now would not be the ideal time to enter the market in that it would be better to wait for a pullback first.
To judge the general mood of the market, you should get an overview of the big stock indices—such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite—to check whether there has been significant buying or selling going on.
Also, in a resource like Investor's Business Daily, you'll be able to see something called an Accumulation/Distribution Rating for a given index, like the Nasdaq. It tells you if investors are buying or selling in a particular index. That will tell you if they have confidence in the market or if they fear a dip.
It's important to keep a close eye on these indices, as a change can happen over just a few weeks. If you fail to pay attention, you could be left standing open-mouthed as a big crash wipes out your returns.
For instance, if you notice that stocks keep opening high and closing low, the market could be entering a bear market, where prices fall. Conversely, if you notice that stocks open weak and close strongly, it could be the first sign of a bull market. Without daily scrutiny of the general market though, you'd never know this was happening.
What you shouldn't do is listen to too many financial analysts or investors' newsletters on the state of the market. For the most part, these are expensive distractions. "Experts" whose opinions contradict one another can just confuse, rather than clarify, things for you. The best strategy is to observe the market itself.
Think of it as a little like observing wildlife. If you were studying tigers, the best resource would be the tigers themselves. You could read all of the literature on tigers in the world, but nothing would be more instructive than watching the animals in their natural habitat. The same is true of that other wild beast, the stock market!
Accordingly, the last bit of actionable advice is to "cut your losses!"
In other words, you should not just know when to get into a stock, but also when to get out—that is, if you don't want to lose lots of money. As a rule, it's a good idea to sell a stock when it plunges to eight percent below your buy-in price. That way, you can keep your losses small as you chase big wins.
