Avoid the Mutual-Fund Mindset

 | Jun 22, 2013 | 12:00 PM EDT
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This past week, the market suffered the worst action of the year. If you were heavily long, it hasn't been much fun. Regardless of how it has affected you, this is a good time to consider how you think about the market.

If you listen to the financial media, "up" is always good and "down" is always bad. The vast majority of people who comment on the market have a mutual-fund mindset. They are almost always fully invested and consider 10% cash to be a lot. They are happy if the market goes straight up day after day, so this sort of action is a disaster.

Ironically, one of the consequences of this mutual-fund mindset is that all weakness is deemed an immediately buy. I don't think I heard anyone in the media, other than Jim Cramer, say that this weakness was not a buy. Whenever we have downtrending action, the media immediately starts talking about buying. They never want you to be sitting in cash for very long. Certainly, you can't have any cash when stocks are uptrending or you will underperform and you can't have any cash for long in a downtrend or you will miss great deals if you don't hurry.

If you are an opportunistic trader, downside action shouldn't be seen as a major negative. Yes, you might suffer some losses on good stocks that you are holding, but volatility is what allows traders to outperform. One of the most difficult things about the market this year is how lopsided the action has been most of the time. It has generally been better to be a buy-and-hold investor rather than an active trader. If you sold into strength, you likely missed out.

What is interesting about the action this past week is that the forces that have been driving the lopsided action, namely central bankers, are now being questioned. The result is a more normal flow as human emotions start to matter.

One of the great things about trading is that you can have a fresh start mentally any time you want one. If you take a hit, wipe the slate clean and start over tomorrow. You might have less capital to work with, but you can dump all those losers and start without any baggage.

The poor action this week actually has me feeling better about the market than I have in some time. I believe it may struggle for a while, but this type of selling and volatility allows nimble traders to be more aggressive and outperform.

The important thing is to keep a positive mental attitude. If you think the market is dead and you won't find any good opportunities, you probably won't. You don't have to be bullish or bearish. You just have to understand that the market is going to move up and down and that we can take advantage of that if we focus on finding the right stocks.

Yes, it was an ugly week. But from a trading standpoint, that is good news if you choose it to be so.



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