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The Good Investor Rule: Focus on How Not to Lose Money

by Steven Sears

The Good Investor Rule: Focus On How Not To Lose Money Splash image

Every year, usually in early spring, much of Wall Street pauses for a moment of silent reflection. Heads are not bowed in remembrance of the fallen, or some historical event. Instead, the silence is in reaction to the somber findings of an annual study that shows many individual investors are trapped in boom and bust cycles of their own making.

DALBAR, a financial services market research firm, recently released the results of their annual Quantitative Analysis of Investor Behavior study. It shows that individual investors have, for much of the past 20 years, significantly trailed market benchmarks, including the S&P 500 index. In 2011, when the S&P 500 had a total return of about 2%, the average equity mutual fund investor lost 5.73%. In 2010, when the S&P 500 rose 9.14%, the average equity investor experienced an annual return of 3.83%. Sometimes, investors have trailed the benchmark by as much as 10%.

The study shows individual investors regularly buy high, sell low, and learn little from their experiences. Severe underperformance is troubling enough since so many people rely on the stock market to finance retirements, cover college tuitions, and and pay for most big-ticket items. But there is another pernicious finding.

DALBAR found that investors never stay in the stock market long enough to really qualify as long-term investors. They hold stock mutual funds for an average of 3.27 years. Bond investors and investors who own diversified portfolios are not much steadier. This suggests that individual investors think of themselves as long-term investors, but they actually act like very bad traders. Few people seem aware of the incongruity between their thoughts and actions. Instead, they greed in and panic out of investments. They are often at odds with the natural five-year market cycle, in which a bull market is born, dies, and is born again. If not for inflation and stock dividends, which historically provide about 45% of stock returns, many investors would have sharply smaller investment portfolios.

History, and Mistakes, Repeat

This disconnect has fascinated me since the Internet bubble burst in 2000, which much of Wall Street likened to the Great Crash of 1929. At the time, I was covering the stock market for Dow Jones Newswires and The Wall Street Journal, and I was in a good position to see if the comparison was valid. I asked our librarian—at the time we still pasted articles into binders or saved them in folders in massive filing cabinets—to pull Wall Street Journal articles that chronicled the Great Crash of 1929.

What was written on those aged pages was eerily familiar. The same logic that described the 1929 market was still being used to describe events in 2000. In fact, if you swapped out the names of investments firms, market pundits, and high-flying stocks, the 1929 article could have been published in 2000. If you read John Kenneth Galbraith’s book, “The Great Crash, 1929” (reprinted by Mariner Books, 2009), or even Charles MacKay’s treatment of Tulip mania in the early 17th century, you can see the similarities yourself.

Yet during the bursting of the Internet bubble, and throughout the credit crisis, I was in contact with a relatively small group of investors who were zigging when others were zagging. In 2000, when the NASDAQ Composite index peaked around 5,000, this group of investors reasoned market conditions could not get much better and they sold, even as many others bought technology stocks in anticipation of greater gains. The same thing happened in October 2007 when the Dow Jones industrial average peaked around 14,000.

Since then, I have been fascinated with why a small group of investors consistently sidesteps much of the investment calamities that ensnare others, and why history so frequently repeats itself in the stock market with so few people seemingly learning anything from what transpired. If you were robbed, or your house caught fire, you would change your behavior. You would get street smart very fast. You would think about risk in meaningful ways. Yet financial calamities often ensnare investors, and they never seem to really evolve their behavior or thinking.

What Separates Successful Investors

If there is a single line of demarcation between consistently successful investors and everyone else, it seems to be captured by a simple idea well known on Wall Street, but not on Main Street: Bad investors think of ways to make money. Good investors think of ways to not lose money.

The “good investor rule” idea seems like common sense, but common sense is often an uncommon virtue. Besides, selling is Wall Street’s essence. Few sales pitches are more attractive than the specter of “buy this and great wealth can be yours.” So before writing my book, “The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails” (John Wiley & Sons, 2012), I asked many top investors and strategists why the good investor rule was so hard for individual investors to understand and follow. Their response was, as one of Wall Street’s top strategists said, that the masses are stupid.

I have difficulty believing that, as I am sure you have a hard time reading it. I do not believe that anyone who leads a vigorous non-financial life and is capable of making complex decisions based on often fragmented information becomes an idiot when entering the stock market. I ultimately came to believe that the reason so many investors have difficulty is because they have never before been told how to think and act like investors. They bring ideas that work on Main Street or in their respective professions to Wall Street, rarely truly understanding that the market is a distinct culture unto itself. The portrayal of the market as a cantankerous, yet ultimately benevolent, ATM does not help, either.

Because so many individual investors enter the stock market intent on making money, they often seem perpetually off balance and they have a hard-time recovering from their mistakes or learning from their experiences. If they lose money, or buy a stock that goes down, they desperately try to make their money back. At a certain point, the risk of not making money exceeds the risk of losing money. Options dealers, for example, are so confident that individual investors are typically wrong that they sometimes do not even hedge those positions.

In essence, individual investors put profits before process and reward before risk. Seasoned investors do the opposite. Dependent on their investment disciplines, they let their investment processes determine the profits. They sell after making a certain amount of money. One fund manager who has beaten the S&P 500 for more than 20 years says he thinks one reason individual investors have such trouble is because they buy stocks based on intuition—absent any financial analysis or investment thesis. When their hot stocks decline, those investors panic and sell because they had no real conviction in the first place. They just wanted to make money.

Strategies for Avoiding Losses

Are you a trader or an investor?

In a 24/7 news cycle and near-constant market coverage, it is increasingly important for investors to remember that they are investors and not traders. If you remember that you are an investor, do not fret over every single tick up or down in your stock’s price. Keep calm, carry on and let time work for you, not against you.

All stocks have an investment thesis. What’s yours?

Answer this simple question to understand why you are buying a stock. The answer helps establish investor conviction level. Each stock has an investment thesis. Do you like the dividend? Are earnings growing? Does the company have innovative products? Or are you simply buying a stock because you read about it someplace, or heard someone recommend it on TV? Such analysis should be common sense, but common sense is an uncommon virtue. Identifying an investment thesis, will help you see if you are buying a stock based on intuition, or analysis.

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Know your stock.

Determine the price-earnings ratio. What are the key financial metrics relevant to the stock? Read the past eight earnings reports. Seek out news stories and analyst reports published in reaction to each earnings report. Determine if your stock is trading at a sharp premium or discount to its peers. Identify top competitors. Identify the benchmark sector index. Is your stock outperforming, or underperforming, the sector benchmark? How about the broad market? All of these questions will help ensure you are not overweighting the stock’s recent performance and it will counterbalance the recency effect.

Assume your analysis is wrong.

Actively seek contrary opinions to disprove your investment thesis. Look at analyst reports, if any exist, that have the opposite views. Determine what factors would change your investment thesis and be grounds for selling. If you only seek information that proves your point, your analysis is not rigorous.

Risk is a four-letter word.

What is the risk to your investment thesis? At what point would you sell your stock and realize profits? Did you set a stop-loss order 10% below the stock’s current price? If so, readjust the stop-loss order as the stock price advances. This is one method for managing risk and protecting profits. It is not ideal in choppy markets, but many investors like its simplicity. Others rebalance their portfolios each quarter, or every six months. They take profits from winning positions and invest those profits in lagging positions; this helps to better balance the risk, and reward, inherent in investing.

Learn from your mistakes.

You will not always win. You will not always know everything. Don’t let a mistake go to waste. Study the mistake to find out why you erred, and use the findings to strengthen your investment process so you don’t make the same mistake again.

Now, dense textbooks and financial models detail stock analysis. It is serious stuff. The Chartered Financial Analyst Program, for example, takes three years to complete, which is as long as law school and a year less than medical school. Yet many investors enter the market without any meaningful preparation other than a desire to make money. Though salient points for managing risk—and for more smartly buying and selling stocks—are covered in my book, such a discussion is beyond the purview of this article, which focuses on some behavioral factors that commonly trip up many investors. If you know about these pitfalls, you will hopefully avoid them, and make better financial decisions for you and your family.

Your Brain on Money

Science is starting to prove that visual cues heavily influence decision-making. All parents worry that watching too much TV, or incessantly playing video games, will rot their kids’ brains. Well, it turns out investors have similar problems. Risk-based decisions, like buying stock, can be manipulated by positive visual cues—look at how TV covers the market—that stimulate a region of the brain called the nucleus accumbens, part of the brain’s reward circuitry. Although the nucleus accumbens, which is activated by drugs, alcohol and sex, has traditionally been studied to understand addiction, it is at the center of emerging research into investing.

This research suggests one reason people have such trouble with the good investor rule is because they often make decisions in a visual stimulation funhouse. Everyone thinks they make decisions based on cold facts, such as stock trading charts, news stories, corporate earnings reports, and stock analyst research reports. But those reports are clouded by initial perceptions. Investors are cued to be bullish or bearish by media reports, or stock charts that show whether share price rose or fell and if it will turn higher or lower. All of this is exacerbated by the popular portrayal of the stock market as some kind of casino culture. Many investors are always excited and eager to make money.

One successful mutual fund manager interviewed in my book says stocks that he sells tend to rise by another 20% once he takes profits and exits. He has already made a profit of anywhere from 50% to more than 100% based on his financial model that led him to buy the stock when it was not on anyone’s radar. But after a prolonged gain, he believes his stocks are noticed by technical analysts who will mention how great the chart looks. Soon, media reports, and chat rooms, mention that Stock X has surged, say 100%, and is trading well above resistance and so forth. Soon, individual investors start buying, and this often attracts seasoned investors and traders to sell—including the mutual fund manager. In essence, individual investors buy near the top, just as prices peak. Then they slide down the slope of hope and often sell low that which they bought high. Such is the power of imagery and the excitement that comes with making money. Some will dispute the role of the nucleus accumbens in investing. But just think of how it feels to look at account balances and see big numbers. It feels good.

If you are still skeptical of the influence of the nucleus accumbens, consider that the FINRA Investor Education Foundation has awarded more than $400,000 to the further study of the nucleus accumbens because it is increasingly clear that many investors make financial decisions that have unexpected consequences.

One Brain. Two Minds.

Just as visual cues influence risk-based decisions, it seems the mind is easily tricked into seeing patterns where they do not exist.

Daniel Kahneman, the only psychologist to ever earn the Nobel Memorial Prize in Economic Sciences, believes the mind has two systems. System 1 is intuitive. System 2 is more calculated and reasoning. Sometimes, System 1 makes decisions that should be made by System 2—and that can create problems for investors.

To illustrate, imagine a medallion with two faces in profile, one facing right and the other facing left. The image is the famous picture of Janus, the Roman god of doors and beginnings. Kahneman says the image of Janus is often used in experiments to show how quickly people see patterns—even if patterns do not exist. In experiments, people are only shown the image of a single face looking right or left. They see it many times: First right, then left, and so on. When people are presented for the first time with the total image of the two faces together, one staring right and one staring left—the first conflict—people think they saw the last image they had just seen, not the total image.

“It takes about three years for people to think they are in a new regime,” Kahneman said at a 2009 conference in Munich. “This turns out to be very important when you are looking at mass phenomenon in the economy, the speed at which people will feel that things will go on forever. They may know it’s a bubble…but this is like System 2 knowledge—it is not System 1 knowledge—and people do act a great deal on System 1 knowledge.” [See the Financial Planning article in this issue for an interview with Daniel Kahneman.]

Kahneman did not elaborate on how the three-year phenomenon might impact investing. But it is likely more than coincidence that every five years marks one market cycle and that DALBAR research on stock ownership patterns show people maintain stock investments for an average of 3.27 years—just a smidgeon longer than the time needed to develop ideas of a new regime and far short of a full market cycle. This suggests many stock investors operate on intuition more than generally understood. It also offers more insights into why so many investors are easily rattled when the stock market sharply declines. It suggests too many people invest money based on emotion and intuition—not analysis.

Put another way: Many people seem to buy securities using System 1 knowledge and sell on System 2. They buy stocks that have advanced for some time and conclude the price will keep rising. After all, the media and stock charts often present compelling evidence that hot stocks will remain hot. Seasoned investors, however, often focus on different facts based on analysis. They may look at how much money they have already made owning the hot stock and decide to take profits. When major investors exit the stock, the stock price often declines, and that can kick-start System 2 knowledge for investors who bought the stock without conducting much of their own research and analysis.

Overconfidence

Many investors are often wrong, but never in doubt.

In essence, the more educated an investor, the more difficult it often is to make good investment decisions. They simply think they know too much or that the skills they use to such great impact in their professional lives translates to the market. This faith in their abilities encourages them to take short cuts.

A study prepared by England’s Office of Fair Trading found that the more people know about an issue, the more likely they were to fall for a scam. This is contrary to the general understanding of scam victims, who are typically thought to be strong contenders for the Darwin Award, which is sarcastically given to those who voluntarily engage in behaviors harmful to themselves.

But when people feel competent in a subject, they tend to seek information that confirms their view. The scientific name of this phenomenon is “confirming information search,” and it causes people to overestimate the quality of information that supports their preferred standpoint. Few mediums make it easier to confirm one’s opinion than the Internet.

The NASD Investor Education Foundation commissioned a study that found investment fraud victims were more likely than others to rely on their own experience and knowledge to make financial decisions. The study concluded that self-reliance could isolate people and cause them to rely on their own judgment when seeking advice might be more appropriate.

Hindsight Bias

Investing is an endeavor that requires constant gathering of information and updating an investment thesis. If you only focus on what you know, and never update your thesis with what you did not know, the thesis often proves to be incorrect.

Yet a common pitfall in the market is that many people think they know something when they really don’t. Behaviorists call this hindsight bias. When people are presented with new information, they think they knew it all along.

A 2008 study of bankers in London and Frankfurt found that hindsight bias causes people—even professionals—to inaccurately estimate asset returns, which leads to bad trades and hurts portfolio performance. Hindsight bias sufferers underestimate volatility, which leads to ineffective use of risk-reduction strategies. Of 85 bankers surveyed, bankers with the lowest hindsight bias made the most money. So, the inability in the market to be surprised, to learn from the past, and to reject hypotheses—even your own—can be very damaging. The 2008 study found that hindsight-bias traders failed to cut their losses at the optimal time while misinterpreting the informational content of new signals, such as earnings or macro-news.

The study found that hindsight bias kept investors from remembering how little they knew before observing an outcome, or getting an answer. The curious fact about overconfidence and the hindsight bias is that people are often incredibly confident they have no biases.

To circumvent those biases requires concerted effort. Sandy Frucher, vice chairman of NASDAQ OMX (exchange operator), has a simple definition of intelligence that may help: He defines smart as knowing what you don’t know. Whitney Tilson, a hedge fund manger, uses a checklist to battle overconfidence:

  • Is this within my circle of competence?
  • Is it a good business?
  • Do I like management?
  • Is the stock incredibly cheap?
  • Am I trembling with greed?

Tilson also seeks out contrary opinions to rebut—rather than confirm—his hypotheses.

Simply slowing down is another tactic. Because the stock market is widely perceived through the prism of real-time news—CNBC, the Internet, blogs, websites, etc.—rather than through trading patterns and formulas buttressed by investment disciplines, there is often a sense of urgency to act now or miss out. Investors who make fast decisions often overemphasize recent stock returns. This compulsion is exacerbated by the concept of induced scarcity: Act now, because Hot Stock XYZ will not be available or the price will surge higher. Studies have shown induced scarcity is a tactic scammers use to compel people to buy now.

All of these forces conspire together and cause emotions—not the mind—to start making decisions. The mind should function like a brake in a car; it should slow down the investment process. But, instead, the mind accelerates much like a car racing down the information highway, collecting fragments of ideas and creating patterns and models that might not really exist.

So much technology exists to animate the market that it is fairly easy to create a private stock market. Larry Summers, a former U.S. Treasury secretary, believes technology misleads investors. “It is like when you build better highways. People tend to drive faster. And actually more people end up dying in auto accidents on these new highways because they make a mistake in estimating how fast they can drive and they end up driving much faster than they should,” Summers said.

Conclusion

A review of key behavioral pitfalls that confront investors admittedly seems dour. But do not conclude that investing is so difficult, financially and psychologically, as to be beyond the knowledge of most people. Instead, conclude that investing is an endeavor of great nuance, worthy of serious study, in which consistent success comes to those who identify and manage risk and then commit money to investments. This risk-adjusted way of thinking, coupled with a very keen understanding of the psychological influences in the market, will keep you grounded.

Paul Tudor Jones, who will always be counted among the world’s great traders, believes most individual investors or traders lose money because they are too focused on making money. “They need to focus on the money they have at risk; how much is at risk in any single investment they have. If everyone spent 90% of their time on that rather than 90% of their time on pie-in-the-sky ideas about how much money they’re going to make, then they’d be incredibly successful investors,” Jones said.

The market is so vast and complicated that it defies any one book or investing style. There is room for many ideas and disciplines. Two common denominators, however, span the spectrum. Understand how you react to market pressures, and remember the simple idea that bad investors think of ways to make money and good investors think of ways to not lose money. Do that, and you will inoculate yourself from the many pitfalls Mr. Market sets for investors.

Steven Sears is a senior editor and columnist with Barron’s and www.barrons.com. He is author of “The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails”( John Wiley & Sons, 2012). .


Discussion

Janusz Trondowski from FL posted over 2 years ago:

It is eye opener to some basic questions about investing psychology.


James Carroll from NE posted over 2 years ago:

Kahneman notes that the more well-informed a scientist is, the harder it is to reason with him or her, which produces divergence in areas such as climate change. The ease of system I thinking gets all sorts of people in trouble.


Stephen Shubert from CA posted over 2 years ago:

I am exploring and hoping that the AAII model portfolios can be used for initial decision making. I am also looking at the stock screening tools.

I wonder if others have found this approach to be successful, at least useful.


Rick Hartwell from KS posted over 2 years ago:

A much appreciated article. It confirms an activity in which I reluctantly read several diverging investment perspectives before making a decision involving any investment change. Although difficult to read something one doesn't "believe", it is often a helpful practice.


Marshall Smith from AL posted over 2 years ago:

Face it, most individuals will never have enough knowledge or information to be successful investing in individual stocks. Most should stick to index funds and maybe a few managed funds.


Vern Andrews from CA posted over 2 years ago:

Excellant article. I believe, however, that a review of the market, the economy, quarterly and annual reports will provide a good reason to invest or not. A scheme that combines the fundamental, technical, and best use of invetment dollars will define the best quality stocks for investment. When these conditions cease to be favorable the stock is a condidate for sale. See website lifetimestrategies2009.com for more details.


Thomas Clasen from VA posted over 2 years ago:

In some cases people sell too soon because they want or need to spend their money. Successful investing requires discipline to a perhaps exceptional degree.


George Westerman from MI posted over 2 years ago:

It clarifies the need for Stock Screening vs Shooting from the Hip.


John Portwood from LA posted over 2 years ago:

In investing process is everything. Superior performance in the long run requires a disciplined operating system supported by logical inputs.As a professional money manager I have succesfully employed quantitative screening techniques in the management of institutional and personal portfolios for more than thirty years.The methods used would be recognizable to anyone who has studied the screening programs provided by AAII.The individual investor can win the investment game. All it takes is discipline and the consistent application of a logical decision making process.Unfortunately,discipline can disappear when emotions intervene.We investors are our own worst enemy.


Tom Fields from VA posted over 2 years ago:

Good article. Easy to forget is the same rigor used to research a buy decision needs to be applied to a cold, hard, view of what your portfolio holds, and why.
The runts of your portfolio litter - the losers, laggards, and misbegotten are deserving of comptempt, not compassion - that's the hard part sometimes. Our natural inclination to want to help the needy, root for the underdog, etc., only trips us up in a world with a different reality.


Shane Milburn from TN posted over 2 years ago:

Paul Tudor Jones is mentioned in the article, and one of my favorite chapters in the Market Wizards book. I have actually tried to change my investing/trading to incorporate some of his thoughts. But I would point out Jones semms much more of a Trader than Investor, and advocates taking very quick losses and letting winners run.(Many trading pros advocate this approach - although Jones is unique in that he tries to catch bottoms - most traders seem to advocate waiting on a trend).

The problem I have trying to incorporate the idea of selling losers quickly is the opposite side of the coin - how to take profits. If you're going to incorporate trading principle like (sell losers quickly) then to have money to buy in the dips you have to sell during market rises (which goes counter to letting profits run).

The idea of reversion to mean investing very much appeals to me (Buffet's idea of being greedy when others are fearful and fearful when others are greedy), but it is difficult to implement.

I can't say that trying to implement more trading ideas into my investing has been beneficial for me - but I am going to keep trying to figure it out because of the dynamics of the lost decade in the market push me in that direction.


Steven Sears from IA posted over 2 years ago:

This is an article to read and re-read again. I have long felt that a short course in crowd psychology would be more valuable in the stock market than a degree in math or accounting. I am guilty on all counts in this article. If I buy a stock at $10.00 and it goes to $10.10 it is a winner and I will hold on even to zero because in my mind 'it is a winner'. Well we Steven Sears's have to help each other. Thanks!


James Mcguire from GA posted over 2 years ago:

Great article. Any investor, seasoned or not, has emotional risk as a component. I never buy a stock, but have the security put back to me at a price I want, not a market price. If the position expires worthless, I employ the same strategy the next option period. When a security is assigned, I then pick a rate of return and sell a call opiton to match a resasonable rate of return. This is discipline, and while it does not work every time, it works at least two-thirds of the time or more. But then the seller of options have the same mathematical chance of having a favorable outcome in inverse relationship to the buyer of the same position.


Michael Apcar from CA posted over 2 years ago:

Excellent article! If one merely takes from this article "Bad investors think of making money" but "Good investors think of ways to not lose money", the battle of investing is almost half won.
I have desperately tried to minimize losses, but not quite arrived ; for emotions get in the way.


David Harned from VA posted about 1 year ago:

While not losing money is a key point in the investment philosophy of Buffet, Graham & other successful investors, they make many other key points which merit further study and application. Controlling greed & minimizing risk are critical..."pigs get fat, hogs get slaughtered". Personally, I have found it helpful to hold a minimum of 25 or so stocks & limit any individual position to no more than 5% of total portfolio value.


Lance Wilcox from IL posted about 1 year ago:

One aspect of investing touched on here that could be developed further is how we handle our ignorance. If there's something that can be known but we don't know it, we simply need to do our homework. But in investing, there is always a lot we don't know because it's intrinsically unknowable. Anyone who thinks he can develop a system for winning roulette will be ruined in a casino; there is no gaming the random. We can know long-term market movements (wildly variable but ultimately up), but we cannot know anything about short-term ones. Enthusiasm and fear are both the result of assuming knowledge we do not and cannot have; it's not the emotions themselves but the tacit assumption of knowledge that makes them dangerous. This also suggests that there are in fact diminishing returns from research on any particular stock. Too much of what the research will tell you will become untrue in short order.


Vaidy Bala from AB posted about 1 year ago:

While this article covers many diverse areas of investment, exactly what one should do, is missing. I think based on my 10 years of individual investing (Self-taught), it is good to rely on fundamentals plus technical analysis. After all, no body can outperform what the Market tells or shows visibly. On another front, intuition is blamed for investment errors, We have to explain what we mean by intuition, self imagination or profound deep insights. Spiritually, insights are clear signals of truth!


Victor Bradford from CO posted about 1 year ago:

The suggestions and principles given in this article are not only excellent ones for investors, they are excellent ones for members of other formal and informal groups as well. For example, physicians and dentists are frequently guilty of hindsight bias, which often presents major problems when omparing old and new techniques. By contrast, Richard Feynman famously observed that science demands a belief in the ignorance of the experts -- including yourself. An exalted degree of humility is a distinct virtue: Eisenhower observed a humble but incompetent person can make great contributions, but he said there is no evil a highly arrogant and incompetent person will not do.
Thanks again for this insightful article.


Donald Logie from CT posted about 1 year ago:

I'm not a trader. I am an investor. I sometimes hold things for years, which is not always beneficial. The article reminds me that I need to improve my own processes. I plan to use it with friends, one of whom seems to be trying to evangelize everyone else on the benefits of option trading without discussing risks. Since I've never done this, I don't know exactly what they are beyond losing some money. I have been, though, quite loud about being careful with these things.


Werner Emmerich from PA posted about 1 year ago:

You can find good individual equities, but over 80% depend on the particular market as a whole. Study what you have learned from this article and apply it to the market!


George Repetti from CA posted about 1 year ago:

On August 5 of last year after reading Stears article in the July issue, I made an entry in my financial journal "bad investors think of ways to make money and good investors think of ways to not lose money". I have tried very hard to follow this advice and as the market has been rewarding during this time, have enjoyed good returns with a relatively conservative, diversified portfolio. As a 74 year old retiree with a portfolio in the multi hundred thousand dollar area it remains to be seen if I will have the fortitude to remain fully invested, assuming investment selection criteria has not changed, when we experience the inevitable 10-15% correction.The concern has always been that time to recoup losses is not on the side of an older investor with modest funds, who counts on a minimum return to provide for a comfortable life style, and tends to reduce holdings during a strong correction (better safe than sorry). This action results in a loss of profit earned during the up period plus gains realized during the recovery period. I don't think I'm the only AAII subscriber in this situation and would like to hear how others deal with it.


Curtis Sears from NC posted about 1 year ago:

I think that I qualify as a long term investor since I still own funds that I bought when I set up my 403b(7) plan in the early 1980s. Every month I contributed the same amount to each. I now am cashing in some of them having now retired. Only one fund am I out of completely, btw I had 8 no load funds. Were they top of the list year after year? NO! However, they were generally average or above most of the time.

I've also, invested in some individual stocks. Sure, some were bad decisions but overall I've done a little better than what I see published as the average returns. Again, I don't trade often. Therein lies one of what I consider my two biggest mistakes. I hold on too long thinking a stock will come back. I need to recognize a dead horse sooner!

The second mistake is that I sell out of the money calls. The effect is the opposite of that above. Yes, I make money but I'd have done better simply holding the stock since I end up selling too soon.

Lesson learned? 1. Buy a good fund and hold it. 2. I'd have done better sticking to lesson number 1 than trying to pick individual stocks. I'm not Warren B. and never will be!


Thomas Pretlow from OH posted about 1 year ago:

I have been an investor for four decades. I found this article full of generalizations about why investors make errors; however, I found little that give me any specific clues as to how to avoid many of the errors that are discussed by the author. Everyone knows to "buy low and sell high"; so what! My biggest problems have not changed much over the years and relate to (a) where to set my stop losses and (b) when to sell. I learned nothing specific about either of these problems from this article.


NewJoizey from NJ posted about 1 year ago:

Thomas Pretlow - I know your frustration. We, whose focus in life may be on our primary occupation, want to have a flowchart to follow, a hard and fast checklist of things to do and actionable items that will yield us wealth if we follow the path. What we want at some level is a "how to" manual. That would be nice, however I think true wealth accumulation as an investor demands more of us. There are no easy answers. AAII is the closest thing to an unbiased no-frills how-to manual for investing that I've seen. I don't think there are hard answers to your (a) and (b). I think the answer is, to the chagrin of us both I might add, "it depends". What I think is required of us is to observe, try to learn lessons, and try to apply them practically in our own particular environments. That's the challenge, and I don't think it's an easy one. I think it involves a lifetime of constant learning, re-evaluation, critical thinking and revisiting.

my $0.02


Mohan from Iowa posted 11 months ago:

1. Buy a good fund and hold it, can be a bad recommendation. Over a period of decades, it costs quite a bit and eats into your earnings. Instead buy a good company doing well for the last 5 decades, do well for the next 5 decades ..Such as JNJ, PG, XOM, GIS to name a few. The cost for this is close to Zero.


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