If investors are suggesting that a crash is imminent, then the market will not crash
Recently quoted in U.S. News & World Report and featured on CNBC, leading Australian investment expert, market commentator, and best-selling author Dale Gillham is certain that if investors are suggesting that a crash is imminent, then the market will not crash.
This is because those who are likely to panic would have already sold out and the professionals would have already adjusted their portfolios, both of which would result in the market drifting down.
Q&A with Dale Gillham
1.) With over 25 years in the financial services industry, what are some of the investment myths you’ve seen people operate under?
One of the biggest myths is that investing is complicated and best left to the “professionals.” This stops the majority of individuals from even considering the stock market as an investment vehicle. Another myth is diversification, or as I like to call it, “di-worsification.”
It is common for individuals to be told that they need to hold 20 to 30 plus stocks in their portfolio in order to minimize risk. While this makes the brokers money, it does very little to enable an investor to generate wealth.
The reason for this is because over-diversifying a portfolio actually exposes a portfolio completely to market risk, which cannot be eliminated by diversification. Indeed, you don’t get twice the benefit from holding twenty stocks than you do from holding ten.
Likewise, you certainly don’t get ten times the benefit from holding 100. It is also common for the industry to promote that you should diversify within asset classes in order to reduce the risk of your investment portfolio and increase returns. Some also argue that investing in international markets can lower risk without sacrificing returns.
Unfortunately, this too is a gimmick that will cost investors much more over the long term. You not only have to contend with market risk in another country, but also the fluctuations in exchange rates, which have the potential to worsen returns as well.
2.) How does someone avoid losing money in the stock market?
Either stay out of the stock market or develop the skills and knowledge to ensure you protect your capital every time you invest. I have never had anyone tell me they were concerned about a stock they owned going up in price, although it is very common to hear from them when it is going down.
This trend begs the question as to why so many people spend the majority of their time looking at what stocks to buy, rather than actually managing their portfolio. Anyone can buy a stock, but so few people know how to protect their capital using sound risk and money management strategies. This aspect of trading, however, is the most critical to your success in the stock market and your longevity in building wealth.
3.) What are some of the secrets to building a powerful portfolio?
You first need to identify the goal of your portfolio. For example, are you seeking growth, or growth and income? Once you have made this decision, you then need to develop a watch list of stocks to suit the goal of your portfolio.
I always recommend that you don’t stray too far outside the top 150 stocks by market capitalization on any market. If you do stray, you will not only increase your risk level, but also the knowledge required to successfully manage the risk. You also need to consider the amount of capital you have to invest, as this will determine how you initially construct your portfolio.
4.) Is achieving financial independence possible if one is aged 40 and has around $25,000 to invest?
Achieving financial independence is possible for anyone; all it takes is a desire to learn the right strategies and putting in the time and effort to implement them. I often say to those I teach that the profits will flow when you earn the right to achieve them. Once you are earning profits consistently, you can then use leverage to accelerate your wealth and achieve your financial goals.
If you can prove to yourself that you can make 10 percent consistently, then moving the decimal point one place to the right to make 100 percent from the same strategy is very achievable if you use leverage. When you compound your returns and use leverage, your wealth accelerate
5.) You have some Golden Rules for investors. What are they and why do you believe in them.
Regardless of the amount of money you have to invest or the instrument you are trading, you should always spend the same amount of time researching your options to ensure you are protecting your capital on each and every occasion.
Always aim to have between five and twelve stocks in your portfolio because smaller portfolios are easier to manage and represent lower risk.
Never invest more than twenty percent of your total capital in any one stock. This rule helps to reduce your exposure to risk, while allowing you to achieve good returns.
Only ever invest 10 percent of your available capital in trading short-term/highly leveraged markets. Allocate the remaining 90 percent to trading a medium to long-term portfolio. This is a very solid money management rule that allows you to take a low risk approach with your money while still achieving good returns on your capital.
6.) Why do you say many investors over complicate the process of taking profits from the market?
This gets down to behavioral patterns, as many over think things because of their underlying beliefs about money or success. It surprises me how many people look to world markets and events in an attempt to understand the stock market, only to suffer from information overload and confusion.
All you really need to do is look in your own backyard to see what is happening. Trading stocks is really quite simple because it is based on the law of supply and demand. If more people are buying than selling, prices go up. If more are selling than buying, prices go down. Unfortunately, most people get this wrong as they are trying to predict the next best thing or be in front of the market. In reality, buying good solid stocks that are rising in price will ensure you profit provided you implement solid risk and money management strategies.
7.) Many people make money in a bull market. What changes for investors when the market declines?
There is an old saying from Dr. Denis Waitley: “your attitude not your aptitude determines your altitude.” People are careless in bull and bear markets, yet bull markets hide many mistakes. In a bull market, traders become increasingly over confident. The more the market rises, the more confidence they gain, until one day the market runs out of buyers.
The market then falls and traders start living in hope of a recovery back to the good old days of a bull market. When this doesn’t happen and the decline continues, traders become increasingly fearful. The more the market falls, the more fearful traders become until the selling is exhausted and the cycle repeats.
When it comes to the stock market, your attitude towards it will determine your success. A person with a healthy attitude will always outperform someone who has more aptitude.
8.) As a wealth manager, why do you recommend individuals should invest on their own?
I believe that with the right knowledge and skill, investors can consistently outperform professionals. This would help them save on the fees they would otherwise have to pay in order to have someone invest on their behalf. Even if individuals were to achieve the same gross return as the institutions, they would do so without having to pay fees, which still means they would outperform the fund managers.
9.) You also don’t endorse day trading. Why?
Trading is about creating a lifestyle, not making it your lifestyle! If you had the opportunity to develop the skills and knowledge that enabled you to trade a couple of hours a week and enjoy your life for the rest of the week rather than replace one job with another by sitting behind a computer all day, I know which one I would choose.
Many have a misguided belief that if they trade more they will make far more money. In reality, however, the opposite rings true. Many individuals are taught to trade on daily charts, which is like having your face planted up against a brick wall.
Looking at this micro detail means you are unable to see the bigger picture of what is actually unfolding in the market. From experience, individuals who trade less, using weekly and monthly charts, make far more money and experience far less stress.
10.) You don’t believe in the “dollar-cost averaging method.” Why?
A common myth that is perpetuated in the financial services industry is the concept of dollar cost averaging, which is a strategy that was designed for institutional funds to enter and exit the market. This allowed them to move depending on the size of their transactions, so as not to substantially move the price of a stock or market.
Proponents of this strategy emphasize the supposed inability of the investor to “time” the market. As a result, investors are encouraged to invest smaller amounts over long periods of time to take advantage of the fluctuations in the market.
In my opinion, this strategy is flawed because the investor has lost the opportunity to invest their funds in assets that are rising in value. In addition, they are taking higher risks by investing in assets that are potentially falling in value, with no guarantee of making a profit!
11.) Are there specific sectors, companies, or markets that you believe should be avoided or particularly pursued?
I don’t advocate specific sectors or companies, although I do believe everyone should shop in their own backyard when it comes to investing in the stock market. The general rule I recommend is to not stray too far outside of the top 150 stocks by market capitalization. These stocks are highly liquid, are generally profitable businesses with, and they are traded heavily by institutions, so the chances of these companies going broke is very small.
12.) Can the market be timed?
This is a resounding yes! Indeed, timing the market is everything. It is important to buy low and sell high, which will give a small investor a huge advantage over fund managers.
Getting it right will alleviate the problems associated with having your capital tied up for years in unproductive investments. Unlike fund managers, who must invest your capital when they receive it, despite whether the market is rising or falling, individuals have the flexibility to diversify the timing of their entry and exit to ensure they only invest when the market is rising. Selling stocks when the market is falling or moving sideways will enable you to compound your returns by selling shares at a higher price and buying at a lower price.
About the Author:
Dale Gillham, labeled as “one of Australia’s most respected analysts” by Wealth Creator Magazine, is the best-selling author of How to Beat the Managed Funds by 20%.
With over 25 years of experience in various sectors of the investment community, including banking, financial planning, stock market education, and professional trading, he has helped countless others reach their goals of achieving financial independence. Dale Gillham co-founded Wealth Within 16 years ago to provide genuine education as well as independent investment advice to traders and investors who have become disillusioned by the industry.