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Conviction can Save Your Portfolio From Volatility

Trading on momentary fears can steer you away from a solid financial plan and the benefits of sticking to that position, Real Money's Tim Collins advises.

After significant losses a week ago, the major indexes recovered to end the week at new record highs on earnings optimism. For many investors, this volatility has come as an unfortunate reality. Last Monday's declines signaled a broad selloff, and by the end of the next trading day most stocks had recovered. What an unfortunate day to have gone on a panic-selling spree.

It’s a lesson, as Tim Collins writes, in conviction.

Read more from Collins over on Real Money. Today he writes, "Two of my small-cap 'billion dollar bets' are about to hit the big time: Cybin and Draganfly soon will move up from the OTC markets to a major exchange; here are their prospects going forward.

You have conviction or you don't, Collins said a recent Real Money column

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Swings like we saw early last week, he said, make him think "You either have total conviction or you have no conviction. In between is going to get you emotionally killed."

Conviction, Collins writes, isn’t about selling at all costs or holding on for dear life. It’s about building your portfolio according to a solid financial plan and then sticking to that position regardless of short-term market fluctuations. Don’t sell just because the market has fallen. Nor should you pick up positions just to abandon them as soon as there is a quick recovery.

"I don't want anyone to mistake conviction with stupidity or the need for 'diamond hands.' This is the perfect opportunity to trim and trail as a name rises. That means something different to everyone, but the concept doesn't change. Take partial profits as something rises and let runners run."

[H]ave conviction or sit it out, but whichever you do, have a plan, Collins advises. "Where are you buying lower if you are still waiting this market out? Where are you selling if you jumped in on the dip? In my view, the second question is the harder one to answer and it will also be the one that separates winners from losers."

In other words, don’t trade on momentary fear or short-term greed. Invest with intent, planning and, above all else, conviction.