This Is a Key Way to Improve Your Investment Returns in 2025
Before you devise strategies for improved returns, you must make a very important decision.
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With the start of a new year fast approaching, it is a good time to reflect on your trading and investment results in 2025. Market conditions always play a part in the returns earned, but no matter how great or poor you have done, there are lessons to be learned.
Most of the time when traders and investors think about what they should do to produce better results, they are vague and don’t have a clear plan for improvement. They do the same things they did in the past, which may still work, but they don’t move to the next level.
So how do you move to the next level rather than just repeat the same mistakes?
The first step is to be very clear about your investing style. Almost everyone who is active in the market suffers from style drift. They let trades turn into investments and vice-versa. If you do not have clarity about your investing style, then you will not have a clear methodology in place. The biggest mistake that most traders make is that they let a poor short-term trade turn into a long-term investment because they refuse to sell a position. The biggest mistake that long-term investors make is that they stay with bad selections far too long.
I try to deal with the issue of style drift but trading the same stock in multiple time frames. If I like a stock longer-term then I hold a core position that I don’t trade. However, I will also trade other positions in the stock with various time frames. I may actively day trade a long-term stock that I also plan to hold for many years.
If you trade in multiple time frames, having a clear plan about position size and applying the appropriate trading methodology to each time frame is extremely important. Style drift can still be a major problem if you don’t clearly separate your core holdings and trading positions.
The next step in improving your performance is stock selection. The longer your investment time frame the more important stock election becomes. The key to long-term investing is to stay with your best ideas and withstand volatility. Even great stocks like Apple AAPL have dropped by 50% or more as it increased over the last 30 years. if you don’t have confidence and conviction then there is no way you can hold on to a position like this but that makes it very difficult to escape a bad long-term position.
Stock selection is also extremely important for active traders, but trading methodology is far more important. Traders want to pick stocks that make big moves but what will determine ultimate success will be the ability to cut losses quickly and to make the most of the winners.
One of my favorite trading aphorisms is from George Soros who once said, “It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”
That is what determines your success more than anything and is at the heart of improving your trading returns. How do you keep losses small while being aggressive with your winners?
Every year one of my resolutions is to trade bigger so I can take advantage of my good calls, but if I do that, it requires a higher level of risk. The only way to control elevate risk is to be more aggressive at quickly cutting a position that isn’t performing as it should. If I trade bigger size in the short term, I also have to be more active at protecting the downside.
Long-term investing is mostly about controlling risk through stock selection, while active trading is mostly about controlling risk through position management. I try to use stock selection to help me reduce trading risk, but it is very easy to fall into style drift when you focus too much on fundamentals and ignore price action.
I’ll have more on these issues in a future column, but the main point I want to make is that before you can improve your investment results, you have to be very clear about your investing and trading style. Only when you have clear time frames in mind can you devise strategies to enhance your returns.
At the time of publication, DePorre had no position in any security mentioned.
