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One distinct difference between market professionals and most amateurs is a sound investment policy that defines goals, objectives, and loss tolerances into a written rules-based discipline that governs decision-making.  Few amateurs have well-defined investment policies and lack the necessary seasoning to make informed investment decisions.  This too often leads to buying and selling that is excessively influenced by personal emotion, bias and inexperience, rather than having clearly defined strategies and rules.

Market professional investors tend to have more of a top-down, “big picture” view of investment portfolios, while amateurs tend to have a collection of individual investments that they thought, at one time or another, were great ideas, but were largely bought without much regard as to how they complemented a particular portfolio. At TrendCalc, we believe that it makes more sense to first determine an overall investment and risk management approach and then choose the specific strategies and investments to achieve the desired risk and reward.

Great investment decision making can be thought of as a mental game of taking and actively managing risk.  Market professional investors are not overly alarmed or afraid of risk; they know what it is and how to manage, contain and take advantage of it. 

Most amateurs typically do not have an appropriate perspective of what risk is and what to do with it.  They tend to fear risk and want to avoid it, sometimes at any cost. They will trade their fears and desired risk avoidance for safer investments or an implied promise of a guarantee.  But those safer investments or promised guarantees often have a different, more costly risk, especially over longer time horizons as they may fail to provide the needed level of return to achieve and maintain personal goals and lifestyles.  This is particularly true with regard to retirement.    

A market professional investor does not flinch or hesitate when a strategy indicates that something needs to be changed. They trust their understanding of investment markets, their defined buy-hold-sell rules, and active risk management guidelines. 

There is a great tendency for amateurs to become progressively more risk averse and then proceed to lessen risk exposure after already suffering through long bear market losses. If you believe what Warren Buffet preaches, this behavior would be opposite of what is best at those precise times.

“As an investor, it is wise to be fearful when others are greedy,

and greedy when others are fearful.” - Warren Buffet

A market professional investor understands the math and probability of capital markets. They tend not to become more (or less) risk averse because they may have suffered a loss (or experienced a gain), whether it is big or small. They rely on their experience and understanding, and maintain objectivity. 

Amateurs are far too influenced by their latest great or grave experience.  They tend to confuse luck as personal genius, which often can lead to over-confidence and foolishness at times when they should otherwise instill more prudence.  Read the Warren Buffet quote again.

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