Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you advice on stock market trading and other investment topics. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Worrying about things like the direction of the economy—rather than about the long-term strengths and weaknesses of the stocks you own—can lead investors into disastrous buy-sell decisions.”

Many investors spend a lot of time worrying about the wrong things, while paying little attention to anything that has a direct impact on the value of their investments. For instance, at times they may mull over every tidbit of economic information that comes out, and how it differs from its predecessor of a week or a month earlier. They hope to detect a pattern—a sign that the economy is mending and headed for a return to steady growth, or deteriorating and doomed to plunge into a renewed recession.

These investors often feel they can cut their investment risk by selling some or all of their stocks in times of high risk, and buying them back when risk is low. This never works well for long. It’s hard to pinpoint market turning points, if only because so many smart people are trying to do the same thing. You’ll rarely if ever sell near the top, nor buy back near the bottom. If you could do that with any consistency, after all, you’d wind up owning a measurable proportion of all the money in the world.

If you constantly worry about the “big picture,” you may at times manage to sell at just the right moment to sidestep a serious downturn. But you may only do that after sitting through a series of downturns. The downturn you avoid may turn out to be the last in a series—the “final leg downward,” as short-term traders like to refer to it.

Why stocks are like commuters, not riders in an elevator

Note, however, that the stocks that make up the market don’t go up and down like a bunch of people in an elevator. They are more like commuters in a city. Most go the same way every morning and evening, with the traffic. But lots of others go against the traffic, if only sporadically. Then too, in a major rise or fall in the stock market, the biggest movers often start early. When the market pulls out of a downturn, the best stocks for the next rising phase may have already begun to rise.

Even if you guess right about a coming market downturn, you may wind up selling your best picks. These might include a super stock that has already set off on what will turn into a 1,000% rise.

Some investors go to the other extreme. They feel a frequent urge to tinker with their portfolio holdings, in response to newspaper articles, TV commentators, the advice of friends and investment professionals, and hunches they derive from these sources. This is also deadly for your profits, but it’s a death of a thousand cuts. You may never have a big loser, because you’ll generally sell before a stock runs into serious problems. But you’ll sell some of your best picks way too early.

We pay attention to the big picture and to lesser investment details. But we base our investment decisions on facts that will boost or undermine a company’s long-term prosperity, since that’s where investors make most of their profits.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Have you sold stocks that you liked because the market was in a serious downturn? Have you sold stocks that you liked because they were in a slumping economic sector? Or do you base your decision to sell or hold a stock strictly on the company’s own strengths and weaknesses?