When it comes to investing, I have found that it has a funny habit of showing us what our strengths – and weaknesses – are. But that’s only if you’re open-minded to your failures and shortcomings. Because trust me, we all have them, and the sooner you notice them the sooner you can act to sort them out! If you look at why you buy and when you buy, you might notice a pattern which can be really useful in showing up areas you need to work on.
Why am I going on about this? Well, every month I add some money to my investment account (and I bet you do too!) and I choose where I want it to be allocated to. I saw that some of my funds had gone down quite a bit (to be fair, nearly everything’s taking a nosedive) so without giving it much thought, I added a bigger chunk to those funds that had fallen the most (aka my losers) than I did to my winners – the funds that had gone up the most that month or, as is the case right now, the funds that had fallen the least.
A couple days later I found myself writing a blog post on how our losses hurt us more than our winners and how we have a tendency to hold onto our losses for longer than we do our winners (this is called the “disposition effect”). And in that moment I realised hey, I was doing the exact same thing! What a hypocrite I was being, and all without even noticing.
Do you cling to your losses? Maybe it’s time to say goodbye!
I wasn’t selling my winners, certainly not, but I wasn’t topping those positions up as much as I was doing my losers. And I realised that it’s because I, like many others, don’t treat my losers and winners equally. I was instinctively buying more of my losing shares than I did with my winning ones because I thought they’re bound to start going up again and that they’ve been grossly oversold.
But that’s not always the case! Sometimes things have become cheap for a reason: no one wants to own them. So if, like me, you find yourself giving more money to your losers than your winners, this next bit is for you. Do keep reading.
Here are some thoughts for you and things I’ve found have really helped me in deciding what positions I should – and shouldn’t – be topping up after making the very silly (but also very normal) move of blindly topping up my losers. I hope this helps you too!
Ask yourself why
The first step is to understand why your holdings have gone up – or down. But let’s first start with the down since that’s usually where we mess up!
Your holdings going down: was this simply a case of macro events? Like rising interest rates causing investors to sell out of growth areas (cough, cough) or was it a case of something specific to that company. Or it could be a case of both. Perhaps the company isn’t doing very well in the current climate and is losing customers thanks to higher prices or it could be that the company is losing market share and overall competitiveness. Whatever it is, investigate it and look deeper.
Now with your holdings that have gone up: why was this the case? Have they being doing well for some time and they’re finally getting market recognition? Are they growing their earnings or dividends? Basically, you’ve gotta figure out whether the good news has already been priced in or if there’s more good news (aka growth) that’s to come which warrants you holding on and even adding to your position.
In both cases, you need to go back to your original reason for buying the company. A really old-fashioned but useful thing is to make a list of why you bought the things you did and keep hold of this. Then, when your holdings have gone up/down by a chunky-and-slightly-suspicous amount, you can see what move comes next.
We tend to instinctively top up our ‘cheap’ holdings because we hate seeing losses on our account. But with our holdings that are consistently doing well, why not add more to that? So that more of your money can be hard at work! If something’s winning, it’s doing it for a reason. Obviously top up your holdings within reason (not exceeding a certain % in one stock for ex) so that it doesn’t take up too much space but yeah, if it’s doing well, hop along and take full advantage of it.
Fight your emotions. Try to think (and act) logically
Most importantly, don’t be afraid to say goodbye to a stock (or fund) that no longer works. There’s nothing worse than clinging to something that deserves to be ditched. It doesn’t mean you’re a bad investor. Quite the opposite.
It means you’re analytical, aware and not too wedded to any one idea which is often what stands between a good investor and a great one. When we buy something, we become attached to it. It’s psychological and we sometimes can’t help ourselves (this is called the “disposition effect” – check it out, it’s super interesting!) and it means we put a greater value on the things in our portfolio than ones that aren’t.
So the first step to helping you remove those losers from your account is by realising you’re psychologically holding onto them and thinking they’ll outperform! But this thinking is really dangerous. So try and remove your emotions from your investment decisions as much as you possibly can and try to think objectively. That way you won’t get caught in the trap of falling in love with your investments!
Balance of probability
We aren’t going to get it right all the time. We’re probably only going to get it right some of the time, or even a few times.
As long as you’re winning more than you are losing, you’ll be doing alright! And alright is quite enough for me.
So enjoy the investment journey and enjoy learning a thing or two about yourself. Investing is more eye-opening than you think!
On that note, all of our portfolios have taken a real hammering in these past few weeks. A lot of this will most likely be related to the current high-inflation, high(er) interest environment and less to do with stock specific stuff.
If you’re able to look past these very heavy (investment) clouds, you’ll be able to let the sunshine in. When it eventually shines. Because it will.
So hang in there and try to enjoy the ride!
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.
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