The Solution to All of Your Investing Troubles

Want a quick answer to solve all of your investing troubles? Know your frame of reference. That's it.

No matter what you are doing you must always operate within a frame of reference, a system, in order to succeed. Investing in stocks is no different. However, since there are so many moving parts that affect the stock market, it can seem futile to discern how to invest for absolute return. With the advent of ETFs, it is no longer necessary to wring your hands trying to find an adviser who will perform in line with the overall market or the sector of your choice. You want exposure to the overall US equity market? Buy SPY -- end of story. You want exposure to big cap technology stocks? Buy QQQQ -- no questions asked. You want exposure to solar stocks? Buy TAN.

However, if you want to achieve positive annual returns regardless of how the overall market performs, buying and holding ETFs won't cut it. What you need is a system, a methodology for allocating your money. Investing based on fundamentals is an attractive proposition at first, as it feels like the right thing to do. You do your 'homework' on a stock, check the recent 10-K filings, read a few analyst reports. That way, when you've lost 40% on your investment you can safely tell yourself, "Well at least I bought the company with the lowest P/E." Let's face it: most of us are not accountants, financial analysts, or Warren Buffett. Unless you fall into one of these categories, leave fundamental analysis for the pros.

Technical analysis, which is simply the study of the movement of price, offers both a simpler and more effective solution to the investing puzzle. After all, you invest, not to look smart or feel good about yourself, but because you want to make money, right? Right. So, in order to benefit from the movement of the price of a stock, you must study the movement of its price. There are various ways to accomplish this, but inherent in all successful investing is an understanding of price trends.

All stock market players are trend-followers in on way or another. The day-trader may 'tape-read' and try to jump ahead of a perceived large buyer in hopes of exiting after the price has trended up a few ticks. The hedge fund manager may short the housing stocks because he believes they are still fundamentally overvalued -- his hope is to cover his short positions after the sector has trended down 15%. And the long-term value investor may buy Chinese stocks even while they are declining, because he hopes to profit from a multi-year uptrend in the stocks that may not have even started yet. The distinction among investing strategies lies in the timeframe traded and the phase of the trend which each strategy targets.

So what timeframe should you trade? What part of the trend should you focus on? The answers to these questions depend on your personality, level of commitment and amount of time you can devote to investing, how much risk capital you can use, and what your goals are in life. If you are an owner of a small business and work 14 hours a day, have three young kids, hate risk-taking, and want to buy that dream house that you and your wife have had your eye on for the past 15 years, day-trading penny stocks is not the best use of your time...but perhaps investing in the S&P500 using month-long trends would suit you. If you are 65 years old, retired, living on a fixed income, and want to travel the world, buying and holding Indian stocks for their 20-year growth prospects makes little sense for you...but trading several-day cycles a few times a month may be a great match for you. If you are 29 years old, aggressive, and cannot stick with a trade for more than a few days, stop investing in utility stocks for the dividends -- day-trading could be your calling.

Because you are human (with the exception of the internet bots reading this), you must understand that your humanness is a liability when it comes to making money investing in stocks. Our emotions control much more of our decision-making than any of us would like to admit. You must therefore set yourself up to win by putting yourself in situations where you are in your element and have confidence. This is why it is crucial to know yourself and know your life goals. Once you understand these things about yourself, your humanness becomes an asset when investing.