Rules-Based Investing Essential for Stock Investors
by Scott O'Neil
The trait most common among successful investors is not intelligence, experience or intuition. It’s discipline.
Disciplined investors actively use a set of proven rules that protect them and guide them through the ups and downs of the stock market. Those ups and downs can stir up costly emotions. Fear and greed (fed by the “noise” of numerous opinions) drive untimely buys and sells. Pride leads us to rationalize losses, and hope makes us hold on to stocks that can demolish a portfolio. Not only do rules prevent disaster, they represent a consistent approach to making profits and taking better control of your portfolio.
Control is the opposite of what most investors have felt this past decade. Since 2000, owning stocks, for all of us, has felt like being in the ring for 12 rounds with Mike Tyson. Your stock gets hit with bad news or an analyst downgrade, and then, just when you’re getting up off of the mat, another earnings season is upon you. Meanwhile, that great fundamental story doesn’t seem to be lifting the stock’s price; you’re still down on the position. Worse, you hear a choir of opinions singing the praises of buying on the dips, saying “what a great value XYZ Corp. is at current prices,” so you buy more. Then one morning you log in to check your account, and your equity is down another 15% or 20% on the year. Just try combating the full range of emotions that enter the picture now. Your retirement is at stake, and you still haven’t recouped losses from the 2000 bear market or maybe the 2008 bear market. Your thoughts get understandably bleak. “I can’t get a break … nothing is working.” Unfortunately, many individual investors are in these shoes right now.
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