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Ray Barros: This Is How Retail Investors Should Trade
Aspire, Thought Leaders | 23 February 2015
By: Lim Si Jie
Articles (169) Profile

1. Keep your goal in mind

It is important for every retail investor to be aware of their ultimate goal in the trade. According to Ray Barros, “a common misconception amongst retail investors is that they invest to have more wealth.”

Money is just a tool of exchange. The aim that most retail investors have to have in mind is financial freedom, not wealth.

2. Create a vision

What is financial freedom to you? Each individual has different ideas of financial freedom. Take some time to think and create a collage of what financial freedom means to you.

  1. What material wants are you aiming for?
    A new car? A holiday every year?/li>

  2. Who are you going to share it with?
    Would financial freedom have the same meaning without the person whom you want to share it with?
  3. Where are you going to live?
    It is up to each retail investor to determine one’s personal wants and needs. Retail investors should review your purpose and vision for investing every now and then.

3. Determine your risk profile

Each individual is different in their ability and willingness to take risks. Retail investors tend to invest in assets because of the potential high returns. Be aware of which risk profile classification you fall in to determine your most ideal type of investment.

4. Devise a plan

Human beings have a need to be certain about events that happen in life. We do not want to be making trades with unfavourable odds. The first step to having an investment plan is to understand that making trades that are guaranteed to win is a myth.

Professional investors would closely follow a fixed analysis process before investing while the majority of the retail investors depend on their gut feelings. Here is a rough plan and analysis process that you can adopt:

i) Educate yourself. You have to be willing to fork out time to enrich yourself with knowledge and technical skills that will inform your decisions. It can be taking up investment courses or even reading investment self-help books. Ray Barros emphasized that this is “the necessary first step to take to improve your odds.”

 ii) Set investment guidelines. Investment guidelines set in place will be useful when analyzing the odds of an investment opportunity. It will be a more accurate gauge of the probability of the investment’s returns. Ray Barros believes that “most retail investors have a tendency to be affected by their emotions” and a set of guidelines would prevent emotional decisions.

A good example would be billionaire investor Warren Buffett. He looks at companies’ stocks that are averagely priced with potential. He would then look at historical five-year margins (ROA, ROE and ROI) and analyze their competitive advantages. Buffett follows this set of guidelines to make investments where the probability favors him.

iii) Money management. Managing losing trades in bad times is as important as making winning trades. One of the most common money management rule of thumb is to risk only two percent of your liquid capital no matter how amazing the returns are. In this manner, you limit your losses while still having upside potential. It is VERY IMPORTANT that you always have a stop loss for every trade and each investment should never take up your whole portfolio.

iv) C.A.N.I.: Constant And Never Ending Improvement. As Ray Barros put it very simply, “Never be satisfied and constantly improve on your investment skills and knowledge” so that you can raise the probabilities of a winning trade.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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