Sooner or later, the market humbles everyone. This doesn’t mean you should approach investing with fear and uncertainty, but a wise investor recognizes that even the pros make mistakes and that a willingness to cut.
It losses quickly and absorb and analyze information will serve him well. Walking the fine line between humility and confidence—and between pride and self-questioning—can be difficult for everyone, but especially for investors guilty of this sin. To make it a bit easier, try following these steps:
1. Make a concerted effort to seek advice and knowledge, and try to take pride in your ability to discern useful from useless information.
As a professional investment advisor, I experience moments when I wonder if it’s worth it to seek additional information and opinions. After all, I’ve been investing for many years, I’ve been very successful, why not just trust my experience and instincts to guide my recommendations. In these moments, I remind myself of a few simple facts: Thousands of U.S. stocks are traded on various exchanges; adding in foreign markets and just considering equity and fixed income vehicles, an infinite number of ways to build a portfolio exist. Read the rest of this entry »
If everything you’ve read up to this point describes your investing behaviors, you should also know that the simple remedy to this sin is trading less and enjoying it more. Reducing the frequency of trading may sound easy to those who aren’t guilty of this sin, but to investing gluttons, it seems antithetical to their entire investing philosophy. If you’re a glutton, you firmly believe that highly active trading is the key to success. If you want to stop being a glutton and stop losing money, then you should be aware of two studies that will disabuse you of your belief in hyperactive trading.
The first study was completed in 1998 by Brad M. Barber and Terrance Odean, professors at the graduate school of management at the University of California at Davis. They examined the trading activity of 78,000 investors over a six-year period and found that the average investor turned over the stocks in his portfolio 80 percent annually, which may explain why individuals usually don’t perform as well as the overall stock market. More significantly, Professors Barber and Odean broke down households into groups based on how frequently they turn over their portfolios. The low turnover group averaged just 1.5 percent turnover per year, meaning that they rarely traded out of stocks. Read the rest of this entry »
Lazy and indifferent investors need to force themselves to pay attention to their investments. If they just tell themselves that they’ll try and pay more attention, they are likely to fail. Typically, a slothful investor will experience an investing loss and vow to pay more attention and become more diligent. He may even make an effort to do so for a while, but the odds are that he’ll slip back into his old behaviors if his investments return to their normal performance. Investing laziness is a habit that’s tough to break, which is why my recommendation is to establish a new routine.
Here are the behaviors that you should incorporate into this routine:
1. SET UP AN E-MAIL ALERT
If you are managing your money yourself and buying individual stocks, this e-mail alert will automatically and regularly provide you with the earnings release of the companies you own. I monitor my personal holdings through a Yahoo! Finance page that tracks all my stocks and allows me to view headlines and news stories from the Wall Street Journal, Dow Jones, and other financial publications. Read the rest of this entry »
The good news about this investing sin is that you have a number of ways to reduce its negative impact. Here are some steps you can take to reduce your gluttony and find a more healthy balance between active trading and watchful waiting:
A. Reserve 5 to 10 percent of your portfolio for aggressive trading.
Just as a diet isn’t designed to eliminate all food—or even all junky food—a good regimen for the investing glutton isn’t to cut trading entirely. For whatever reason, you enjoy and need the action of buying and selling. What you don’t need is for this need to eat away at your portfolio. Therefore, reserve a small percentage to feed this habit. If you only actively trade 100 shares instead of 1,000, you probably won’t do much damage.
Remember, though, that this 10 percent high-end percentage is absolute! Invariably, a time will come when the actively traded 10 percent will be performing well, and the inner glutton’s voice will say, “Don’t be a sucker; you’re a much better investor now than before; up the percentage to 20 percent?’ Do not heed this voice. It is the same voice the dieter hears after losing ten pounds, the voice that says, “Another slice of chocolate cake won’t hurt you? Read the rest of this entry »
