Investing Knowledge

It has been a crazy year for stock markets, with plenty of lessons to be learned. Here are 10 things this insane year has taught me.

1. Trading too often eats your profits

It's not just the charges and stamp duty (although that doesn't help). It's not just the bid/offer spread on your new purchase (although that doesn't help either). It's rank bad strategy. Jumping in and out of stocks suggests you bought for the wrong reason, or fled at the first sign of gunfire.

2. You need a strategy

As Fool user rober09 commented after my recent article Why I'm Hoping for Further Market Falls, all too often I have been "pulled from pillar to post by events, which in my opinion is no way to make money". Too true. I sold HSBC (LSE: HSBA.L - news) (LSE: HSBA) in May, because it looked a bit stale, and bought Lloyds Banking Group (LSE: LLOY.L - news) (LSE: LLOY) in October, thinking it might prove a bit spicy. Both trades were based on short-term impressions, and went badly wrong. HSBC is up 20% since I sold and Lloyds down 20%. Ignore the day-to-day noise!

3. We're in this for the long-term

This time last year, markets leapt off a bridge and we had no idea when the bungee rope would break our fall (or indeed if there was a rope). By March, the elastic had stretched far enough, and we started bouncing up again. It was head-spinning, but didn't cost you a penny unless you cashed in your shares. The longer you can stick things out, the less terrifying the ride will be.

4. Investing is riveting when markets are going up

During the peak of this year's rally I was checking my online trading platforms two or three times a day, and having a thoroughly nice time doing so. But when markets dipped, or I made silly mistakes, I went into denial. I could barely peak at the results through my fingers. This may not be such a bad thing, if it stops you from panicking and selling up too quickly, or giving up on the whole bang-shoot in dismay.

5. Small stocks aren't always volatile

Big names such as Royal Dutch Shell (Amsterdam: RDSA.AS - news) (LSE: RDSB), Barclays (LSE: BARC.L - news) (LSE: BARC), GlaxoSmithKline (LSE: GSK.L - news) (LSE: GSK) and Prudential (LSE: PRU) have been hopping up and down like an angry bunnies on steroids in recent weeks (mostly down), yet my AIM stocks have taken recent events on the chin. One or two have even edged upwards. Thinly traded stocks can be immune to daily sentiment swings, although they can still fall a lot faster on poor company results, or when investors start exiting markets en masse.

6. You can check your portfolio too often

It's been a thrilling rally, but it can also give you false expectations of how quickly you can make money from stocks and shares. Logging on breathlessly every few hours to see how much richer you are, as I did for a while, isn't just a waste of time, it can suck you into making bad decisions. It can make you impatient with steady, solid dividend earners, and tempt you to churn your portfolio at great cost and effort: see points 1 and 3.

7. There is no substitute for research

As I have moaned before, I bought Lloyds TSB and Royal Bank of Scotland (LSE: RBS.L - news) (LSE: RBS) just a few weeks ago, on the grounds that they had fallen so low, they must improve. I hoped they might compensate for missing out on this spring's dash for trash. I ignored what was happening behind the scenes, and now I'm down 30%. And here is a supplementary lesson: Trash doesn't always turn into cash. Still, point 3 may still see me through. Fingers crossed!

8. Selling up only works if you buy something better

Every time I sold a stock or fund this year, my new buy dropped at least 10%. Bad luck? Maybe. Lousy research? See (0491.HK - news) point 7. Some of my buys have recovered the lost ground and then some, others have fallen even further behind. People say you should never be scared to bank a profit, which is true, unless you turn it into an instant loss.

9. Patience is a virtue

City of London Investment Group (LSE: CLIG), one of Maynard Paton's tips in Champion Shares, did nothing after I bought it on 11 June, apart from losing me money on the bid/offer spread. I watched it impatiently for week after week, sometimes yelling at it to get a move on, as if it was a recalcitrant donkey. Nothing happened. Then it sprang into life in early September, and now it kicks like a mule. Sometimes you just have to watch and wait. Or avert your eyes and wait (see point 4).

10. The more you put in, the more you get out

I started edging back into the market in April, but after last year's horror show, I only dared invest £1,000 a throw. I was a bit short of funds,  but the barnstorming performance of many shares since then hasn't made me that much richer. It is amazing how much quicker the returns rack up when you invest £2,000, £3,000 or more but unfortunately the same can be said for any losses!

Harvey owns shares in Lloyds, RBS and City of London Investment Group.