Economists like to assume that investors are rational people making rational decisions. But this couldn’t be farther from the truth. When we invest we come with baggage, of different shapes and sizes. We come with our luggage of emotions; our past experiences (the good and the bad) along with our own unique appetite for risk. Some of us prefer to take on loads more risk like all that high-growth-tech-crypto-kinda-stuff while others are more conservative – these folk will probably, no – definitely own a bunch of bonds.
No two people are the same and our decisions are influenced by all these things which may cause us to make investment decisions that aren’t good for us, and our portfolios. And one of the things we aren’t great at doing is running our winners and cutting our losses. Instead, we often do the exact opposite! We cut our winners before they’ve even had a chance to fly and we run with our losers. And I think one of the reasons we do this (among others) is that we don’t like to lose money.
Our Fear Of Losing Money Can Seriously Hold Us Back
We’re so afraid of losing our hard-earned cash that as soon as we’ve made a profit, what do we do? We take it and cut off its legs. Leaving it unable to grow and flourish. When it comes to losses (all paper ones btw since they’re only actualised when we sell), we cling onto them for dear life! Afraid of cutting the weeds. We simply can’t bear to click ‘sell’ on a loss since that would mean we’ve lost money and who wants that let alone admitting to it. No thank you, you say.
We’re so afraid of losing money that we don’t even give ourselves the time and space to make mistakes. To accept losses and to be able to properly deal with them. To make money, you’ve gotta be okay with losing some. Ask the best investors, they’ve all made mistakes. They’ve all lost money on a bad investment (or several!) at some point in time but they don’t let that deter them from spotting winners, and letting them run free. The key is to win, on average, more than you lose. Not losing means you aren’t trying hard enough. Read here what 3 things you should avoid to maximise your returns and lower losses.
And only once we get over this (almost tangible) fear of losing money then we’ll truly be able to make money. Fear is one of the most powerful human emotions but it can derail us, and our investments with it. Don’t let fear hold you back or else you’ll never invest. And when and if you do get round to investing, you might be too scared to lose that you’ll sell the second you get the chance, ruining any sort of financial freedom you could’ve had. Or you might take on such a small amount of risk that you don’t really stand a chance of growing your capital. Read here how you can overcome these 3 fears that could be holding your investments back.
No One Knows It All, And That’s Okay!
Our egos manage to wiggle their way into all of this. See, when we make a profit (however big or small) we feel good. We think we must be doing something right. We think we’re smart – whatever that means! Our egos can get ahead of themselves, fooling us into doing stupid things, like selling our winners, to validate what we think is us being a great investor. And there was no better year for our egos than 2021: The year of the (almost) everything rally. Though read here why things are changing – past performance really is no indicator of future performance.
We looked at our portfolios and almost everything was going up. Apart from our mining and energy (if we owned any!) – who wants all that boring old stuff, anyway, right? From tech to crypto, they were going to the moon. Only to come crashing down a little while later but no one wanted to believe that all good things must come to an end. So instead, we basked in our glory.
We looked at our portfolios and almost everything was going up. This made us grin, smirk and think damn I must be smart. But we’re not. It’s thanks to raining stimmi checks and bucketloads of no-strings-attached money plus rock-bottom interest rates that gave stock markets the biggest boost in the world. And investors got ahead of ahead of themselves. And then look what happened. Stocks started to wobble and this house of cards was no longer able to hold its own.
Perhaps the question lies not in whether we should cut our losses sooner but whether we should meddle at all. See, had I cut my losses – all that mining and energy aka the stuff the whole world wants right now, I’d be crying at this point in time. If you have a long stretch of time ahead of you, and have set up a nicely diversified portfolio, there’s no reason why you should need to fiddle with it. All the time.
Time, Time, Time.
I know that many of you might not agree with me on this but a ‘buy and hold’ strategy (for decades not days) usually works out since we’re terrible at timing plus we often let our pesky emotions get in the way that we’d honestly be better off had we not have touched it to begin with! Course you can skim your profits here and there (I hope folk did that at the end of 2021) and invest it elsewhere but why stunt your winners? Why choke them? Instead, let them do their thing. If they’re winning, it’s for a reason. So let them shine, and let them make you money.
If you’re forever buying and selling, you’re bound to make mistakes and often act on impulse rather than on logic. We all think that we’re making sound decisions but in reality we’re making the dumbest moves possible. Our future self would be embarrassed! When markets started to crumble after Russia’s invasion of Ukraine, I thought to myself, sure I could sell a chunk of my portfolio and stash it in ultra-safe spaces and load up on energy but when would I dip my toes back into markets? When this whole thing blows over? When all the chaos has finally subsided? And when will that be?
I’d probably be too anxious, fretting about the price and the state of things when in reality, all I should be worrying about is my time in the market. Not trying to time anything or guess anything. The longer I’m invested, the better my chances. And markets always recover. And they also happen to recover way quicker than economies (or in this case, geopolitics!) and you don’t wanna be out of the market during its very best days.
Back in 2020, when the S&P 500 jumped up by 50% between its March lows and August, I only got in the markets in November which meant I missed out on that real biggie. Sure, things did pretty well from November onwards but mid-to-late 2021 things started to cool down.
So if you’re in the markets right now, try and stick it out. And if this war really escalates and becomes something way bigger and greater than any of us have imagined then trust me, share prices aren’t gonna be on top of your mind.
Over the very long-term, markets do recover. And our stock markets have been through two world wars and countless in between. And they’re still here to tell the tale.
They’re more resilient than we give them credit for.
So stay. Don’t quit when the going gets tough.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 