As we wrap up the last two-trading days of the decade, I am wrapping up the recent series on “investing rules” (see here and here). The purpose of this series is to remind investors of the importance of having an investment discipline to protect investment capital when market volatility eventually comes.
I know…I know…volatility seems to be a thing of the past, particularly given the amount of exuberance currently embedded in the markets. This was a point I made in the most recent newsletter:
I have written many articles previously on investing, portfolio and risk management, and the fallacy of long-term “average” rates of returns. Unfortunately, few heed these warnings until it is generally far too late.
The biggest problems facing investors over the long-term are falling prey to the various psychological behaviors which impede our investing success. From herding to recency bias, to the “gambler’s fallacy,” these behaviors create critical errors in our portfolio management process, which ultimately leads to the destruction of our investment capital.
As I have addressed many times previously, the major problem is the loss of “time” to achieve your investment goals. When a major correction occurs in the financial markets, which occur quite frequently, getting back to even is NOT the real problem. While capital can be recovered following a destructive event, the time to reach your investment goals is permanently lost.
The problem is that most mainstream commentators continue to suggest that “you can not manage” your money. If you sell, then you are going to “miss out” on some level of the bull market advance. The problem is they fail to tell you what happens when you lose a large chunk of your capital by chasing the bull market to its inevitable conclusion. (See “Math Of Loss”)
While investing money is easy, it is the management of the inherent “risks” that are critical to your long-term success. This is why every great investor in history is defined by the methods which dictate both the “buy”, but most importantly, “the sell” process.
The difference between a successful long term investor, and an unsuccessful one, comes down to following very simple rules. Yes, I said simple rules, and they are; but they are incredibly difficult to follow in the midst of a bull market. Why? Because of the simple fact that they require you to do the exact OPPOSITE of what your basic human emotions tell you to do:
- Buy stuff when it is being liquidated by everyone else, and;
- Sell stuff when it is going to the moon.