If there’s one single, indispensible key to successful investing, it’s to go with the flow.
That’s my distillation of well-worn market mantras that you’re probably familiar with.
The trend is your friend.
Don’t fight the tape.
Trade the market you are given, not the one you want.
And don’t fight the Fed.
Go with the flow.
You can do all the homework and analysis you want – and be right – and yet still lose money. That happens when you own stocks you love, but the market isn’t loving any stocks. It can happen when you try to pick bottoms, and you get in before the market heads a lot lower.
And while you won’t lose any money by not being in the market, you’re not going to make any money in it either.
That brings us to today. We’ve had a furious up-move in the market since March 2009. We’re scratching at new all-time highs, and global markets are dancing to the same tune.
But the world hasn’t changed since last May – or the May before, when markets swooned on fears about Europe, America’s fiscal fiasco, a slowing China, or any of the other dark clouds that, at any time, can rain on the markets.
So, are we going higher?
Are we going to get a wicked correction? Is the sun rising or setting?
We don’t know if the market is going higher from here or if it’s headed down. But, we do know that the sun rises and the sun sets… every day.
That’s why, even if you could distill all of the unknowns that you don’t know into a plan of action, the only sensible plan is to not guess, but simply to go with the flow.
Going with the flow means following the trend – not fighting the tape or the Fed. But it’s not just a different way of saying those things.
For me, it’s about looking underneath what’s being talked about. It’s looking at investor psychology by looking at the flow of capital into or out of the market.
I go with the flow of capital. I don’t complicate my money-making endeavors in the market by overanalyzing or hoping. The most important thing for me is simply being on the right side of which direction capital is flowing.
Capital has been flowing into the market. It doesn’t matter that a lot of that flow is coming from the Fed’s stimulus efforts, it’s still capital flowing in. Don’t complicate things.
If capital starts flowing out of the market, I’m not going to fight that trend. Once I recognize that it’s the force of the prevailing psychology, I’ll go with the flow.
And you should, too. Don’t sit on the sidelines if there’s a party going on. Join it.
That’s what’s happening now. That’s what has been happening.
Don’t worry about what you don’t know. Just have an exit plan in place. It’s as simple as having stops – and raising them as your positions become more profitable.
So what if you get stopped out – especially with a profit – and the party gets going again. Get back in, even if that means higher prices than where you got out. Simply tighten up your new stops by placing them just below where the latest good support level is.
And, because it’s widely available, always have downside protection in place. It’s easy enough with ETFs that offer inverse positioning and with instruments like VXX.
I look at the market like the old lotto saying, “You’ve got to be in it to win it.”
Up or down, it doesn’t matter to me… as long as I go with the flow.