The Average Joe's Guide to Playing the Stock Market: Take the Fear Out of It

My stock portfolio is down overall by 18%. One stock in particular has lost over 41% of its value since I bought it. I should be crapping my pants, feeling short of breath, and pulling out my hair. But I'm not.

On the contrary, I am happy. I like seeing red. No, I am not a day trader. Nor do I short stocks. I own all of these lovely companies fair and square with my own hard-earned money. I have faith in every one of these stocks, except for one. There's always one stock pick that will cause regret, but it's all part of the game.

So why am I not concerned? Why am I not putting in sell orders and dumping my shares? Because it doesn't fit in with my strategy. A wise person once said, "The only time you lose money in the stock market is when you sell while it is down." I take this wisdom to heart. Just because earnings are less than forecasted this quarter doesn't mean the next big deal isn't around the next corner. A little red does not bother me because I have no intentions of selling while a stock is down.

I didn't always feel this calm. Believe me, I didn't. I spent the first year fretting over every little bump and rise, ready to hit the sell button as soon as I felt extreme panic. Meanwhile, the higher a stock went, the more excited I got, and the more reluctant I got to sell it. After all, if I sold now, how much would I be missing out on if it went higher after I sold?

I quickly realized that if I allowed my emotions to drive my sells and buys, I would never make money. If I let my emotions rule, I would sell when a stock tanked, out of fear of losing everything I put in, and I would end up holding onto winning stocks, unable to part with my projected hope of it going higher and losing out on unrealized gains. The truth is, you never know when a stock is going to bottom out, and you never know when a stock is going to hit its peak. I know it's been said a million times before, but you cannot time the market. If you play with the expectation of timing the market, you will lose money.

Instead, make hard and fast rules for buying and selling. My rules, for instance, are to sell when a stock has increased by 12% or more at the end of a quarter, or sell if it increases to 40% before the quarter is up. If a stock happens to be down at the end of a quarter, I buy more of it. Buying at a lower cost reduces my dollar cost average, making it easier to earn more when the stock rebounds.

And that's really all there is to my stock strategy. I research every company before making the decision to buy, of course. And I watch them on a daily basis. I check in a few times a day, because a stock has sky-rocketed during a single business day, and I want to catch any windfalls if they are to be had.

The reason this simple strategy works is because it takes the emotion out of buying and selling. The stock market is nothing more than legalized gambling. The company is the house and you are the patron. You have to set some ground rules so that you know when to walk away from the table. If you don't set ground rules, then your emotions are liable to take over and do the driving for you and you will fail to achieve your goals. When emotions have the wheel, nothing good ever happens.

It may take a while and some practice to find ground rules that work for you. It took a while to come up with this investing strategy, but I'm sticking with it because it makes me feel comfortable. If you can establish ground rules and invest on a regular basis, you will achieve your goals, no matter what the stock market does.