Investing and trading are two entirely different things. Investing is something you do for the long-term based solely upon fundamental analysis. If you feel there will be a rising demand, for example, you can fundamentally make a mathematical case for a stock to rise - and hope that a black swan doesn't prove you wrong while you wait for possibly three, five, or even ten years until you are proven right.
That is investing.
What I tend to do is I buy my stocks with an investment strategy and then I always try to trade a few of those stocks around to make a few extra bucks of income while I'm waiting. A decently diversified portfolio should have around 20 stocks - each "full position" ought to be around 5% of your portfolio. You should have no more than 20% of your portfolio in any one sector, meaning that if you buy full positions in Apple, Google, Blackberry and Facebook, your "tech sector" is now fully 20% of your portfolio and you can't buy another stock in that sector without selling one of the stocks you already own first. (You can see why it was so bad for me to break this rule with what happened to me in the gold mining sector - Stupid. Stupid. Stupid.).
This type of investment strategy works beautifully for generating some extra income from trading, because out of five different sectors, each with four different stocks, there is usually something that is in the profit and available to be played with. Maybe the mining sector sucks right now, but tech is doing great - so you trade around with a tech stock and leave everything else alone. If the trading gets away on you - for example, I buy my one stock at $10.00, sell it at $10.75 and wait for it to drop back to $10.25... and wait... and watch it instead rise to $11.75, I just take my $750 profit and never look at that stock again - I'll find a new stock in that sector to replace it with. Often times, even with my long-term investments, when I decide to sell them, I will play with trading them as long as I can until the market takes it out of my reach. I was going to sell it anyways, why not try to make an extra thousand or two for pin money along the way. This trading strategy that you "let get away from you" also has the effect of making you take profits on your stocks as they rise. You should always be taking some profits and raising cash when they make a considerable move upwards anyways - nobody ever went broke making a profit, but they do go broke by not taking profits when they are available to be taken. If you hold Google all the way from $500 to $1200, then watch it drop all the way back down to $400, you never actually made any money at all - even though you might have been telling yourself you had because you figured out your "profit" on a calculator each day. Profits sit in the bank and look like hard currency.
But alas, I have been creamed in the markets over the past two years because I broke my rules and was severely over-invested in one sector, then further broke my rules by over-riding my stop-loss discipline. So take what I have to say with a grain of salt. I am putting my failures up here to show what not to do, as well as putting up my successes to show what I've found actually works.
was during the Credit Crisis of '08/09. I could have done better - much better. I still had some capital but didn't put it to good enough use when I could have. For example, the Canadian banking sector got just creamed during the crisis. These were "blue-chip for grannies and orphans" kind of stocks that generally paid a nice dividend of around 3%/yr, and the banks generally raise the dividends once or twice a year, and have for decades - some for over a century. One bank - the Bank of Montreal, lost 60% of its market-cap during the crisis because they were over-exposed to US debt, and all five Canadian banks got smoked in the stock market because of it. RBC, Scotiabank, CIBC, TD etc., all were more than halved in value and their yields from dividends rose into the 8-9% range. The Bank of Montreal's was paying 11% when it's stock dropped into the $25 range. I was telling myself... buy into them... buy into them... you really should... ALL of these banks aren't going to go broke, I doubt even the Bank of Montreal is going to go broke. I chickened out and didn't buy them. A year or two later, they had all doubled or more in price - plus they paid one heck of a good return through dividends while doing so. It was an opportunity lost.
It is apparent to me that an effective trading strategy is also one that constantly raises capital to take advantage of the inevitable crash, which on average occur once every five and a half years. Only rarely in the past century have we gone longer than seven years without a crash. Crashes are regular occurrences and you should always be prepared for them because you can make more money buying into a crash that blindly drags down quality companies, than you can from successfully investing in those same companies during stable times.
As an individual investor, you don't have to be like all those fancy shmancy investment managers on TV. They often have mandates to be fully invested in the markets - which is why they are always talking about "beating the market" even in a down year. Yeah, sure... the markets went down 20% this year, but you "only" went down 15%. See? I beat the market by 5%. Success! They do it this way because most of them don't actually get paid by performance, but by an MER of perhaps 2-3% - a commission they get paid on the full amount of their multi-million (or billion) dollar portfolio which they manage. They will make more money by safely parking it in the market - beating it by only a few percent - and then trying to convince more people to give them money to invest, than they will make by being effective investors. If you get paid a 2.5% MER on a million dollars, it comes to $25,000/yr. Sure these guys are still overall trying to make money, but they often do much better by convincing ten more people to give them another million to invest with, than trying to double the initial million. $2 million means $50,000/yr, and it doesn't really matter to them if the stocks go up or down overall. If that $2 million drops to $1.7 million, they still collect their MER of 2.5% on the $1.7 million... sell another three people on giving him $100,000 each, and he's still making $50,000/yr even though he's lost money for all of his clients. I very much dislike that system, and it also makes me suspect of some professional investors' advice - just like car salesmen will never honestly tell you that you ought to quit driving altogether and buy a bike. It's against his interests to do so, even if it's in yours.
There are bigger "channels" in the general market than just the "swing" of a stock as it bounces around in the short term. These big channels - which include market corrections and even the crashes - are never taken fully advantage of by professional investors who are always mandated to be fully invested... but you, as an individual, don't have any such mandate.
The crash is not only where all the money gets lost... it's also where all the money gets made - for those who are disciplined enough to prepare for it. In fact, there is a strong case to be made that the opportunities in a crash are so great, that one should only invest during a crash, then start selling out a few years later and sitting on 100% cash until the markets demolish themselves again in their inevitable boom-bust cycle which has been a regularly occurring trend for centuries already.
What I Learned Managing My Own Investment Portfolio
It's All About Getting Out, Not In -- by Mark St. Cyr