The Number One Portfolio Killer — And How To Avoid It…
Are you controlling your investments, or are they controlling you?
I’ll admit, it’s a tough question — especially when the market isn’t doing so hot. Most individual investors don’t even bother to think about it. But if you consider yourself a classic “buy-and-hold” investor, you have to wonder whether all that “holding” is really just letting the market jerk you around.
When volatility is high, many investors lose sleep worrying about their portfolio. But they don’t have to…
It’s easy to feel good about a strategy when everything’s going up, but when the market is tumbling, those long sleepless nights are filled with anxiety, fear, and uneasiness.
And the worst part is that it paralyzes you. You’re undecided on what to do, so you don’t do anything. You simply watch your profits vanish, while watching your small losers turn into large ones. You sit around and hope the market turns around so you can break even. And if things are bad enough, you may even tell yourself that if you could just get your money back, you’ll never invest in stocks again.
To understand what I mean, I want to show you a version of a chart that may look familiar to readers of my other premium advisory, Capital Wealth Letter…
Below is a 10-year chart of IBM (NYSE: IBM), a stock that has been touted for years as “cheap” and “undervalued”. It’s the kind of blue-chip holding that pundits in the financial media will tell you is a classic portfolio anchor.
Investors in Big Blue have been waiting and hoping for a turnaround for years. Yet it has severely underperformed the market over the past 10 years. And look at the stomach-churning ride you were subjected to as a “buy and hold” investor if you bought at any point along this timeline. You would have been far better off just parking that money in an S&P 500 index fund.
I’m not saying this to denigrate “buy-and-hold” investors. Exactly the opposite, in fact. Sure, the strategy can work — but it takes patience (which most of us don’t have) and, more importantly, time (which is in even shorter supply).
Emotions: The Number One Portfolio Killer
Here’s the reality that too many individual investors are afraid to face. That “buy and hold” strategy they think they’re practicing isn’t the real thing. It’s centered on “hope” more than anything else. To become truly successful at investing — and regain those good nights of sleep — you can’t allow your emotions to take control of your portfolio.
Emotions are the number one killer of portfolios. One of the best ways to alleviate this massive problem is to have plan in place — more importantly, an exit plan.
You see, buying a stock is the easy part… Anybody can go out and type in a ticker symbol and hit the buy button. But where you’ll really separate yourself is knowing when to sell.
One of the best ways I’ve found is to use a rules-based, systematic approach. It doesn’t have to be overly complicated. Even setting profit targets and a stop-loss before you buy a stock will put you miles ahead of the average investor. It helps takes emotion out of the equation.
Sure, it takes talent to bag more than your fair share of winners. But you’re going to have losers, too. And if you can get out quickly before any serious damage is done, even better.
There may even be times when moving your portfolio into cash is appropriate (i.e. when things get extremely dicey in the market). That’s fine. It’s not an admonition of defeat. There have been times when a third — or even half — of the portfolio in my premium services was in cash. We didn’t do this out of fear — we did it because there were serious warning signs in the market. And more times than not, it turned out to be a good move.
When the market takes those “buy-and-hold” investors on a wild ride, our portfolio can weather those blows just fine. Even better, when things calm down, we have dry powder on hand to get right back to work.
Now, let me be clear… I’m not saying you should have that much in cash all the time. What I am saying is that by having an exit plan in place, we can let our winners ride and cut our losers short. But you don’t have to immediately plow that money into something new.
If you don’t have a plan or system in place, then I urge you to get one. Again, even if it’s as something as simple as using a stop loss.
Think back to the IBM example… You would have been far better off if you set a stop loss of, say, 20% and sold no matter what. (The same goes for profit targets, by the way.)
The point is, don’t be afraid to sell a stock for a modest loss. You’ll be much happier to sell it at a small loss than watch it turn into a massive one, all because you were “hoping” for it to get back to even.
The bottom line is that nobody cares more about your investments and your money more than you do. That’s why you need to take control of it, instead of letting it controlling you.
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