buy-and-sell decisions based solely on price movements is a strong indication
you are outside your comfort zone. Buy at 5 and sell at 10 or buy at 10
and sell at 5 is trouble both financially and emotionally. Buy-and-sell decisions
need to be made on the basis of knowledge of who you are as an
investor, a fundamental understanding of the investment, and a determination
of whether the underlying fundamentals of the investment meet your
investment needs. If a company or mutual fund is having a bad quarter or a
bad year or a great quarter or a great year, you need to understand how it is
reacting to that situation and if its reaction indicates that it fits your investment
needs. Price movements are external factors that tell you little about
the company, the mutual fund, or yourself.
An emotionally mature adult would not make personal relationship decisions
based solely on external factors. If you are in a new romantic relationship
and your lover’s mother suddenly dies, do you end the relationship
immediately (sell) or watch how your lover reacts to the loss of a mother
and watch how you react to your lover’s loss. If your lover then inherits half
a million dollars, do you make a decision to marry (buy) or do you watch
how your lover reacts to new wealth and how you react to your lover’s
financial gain. In a romantic relationship, your goal is to build a long-term
positive relationship. Breaking up or staying together based on external factors
such as a death or inheritance is clearly immature. The internal factors,
your lover’s emotional development and your own, are the real basis for
judging the long-term potential for marriage or a parting. The internal factors,
your emotional makeup and investment policy, and the company’s reaction
to success or failure, are the real basis to determine buy-and-sell
decisions.
Investing outside the comfort zone is exemplified by basing trading decisions
solely on price. Other external factors also influence investors when
they are outside their comfort zone. Consider the example of Michael and
Susan.
Michael and Susan have been saving for retirement for 10 years. They
are also, like all the characters in this book, a composite from interviews
and people I have worked with during the past 21 years. Since Michael’s
major promotion 10 years ago, they have invested about $50,000 a year.
Prior to that, they had less than $10,000 in investments. Now, stockbrokers,
realtors, insurance salespeople, venture capitalists, hedge fund vendors, and
other investment product peddlers have their number and routinely call them.
Michael and Susan have compiled investments worth $450,000 during
the past 10 years: half in a 401(k) and half in an online brokerage account.
Immediately, you might notice the math. If they have invested $50,000 a
year for the past 10 years, achieving a zero total return on their money, they
should have $500,000 in investments. You might do the math, but Michael
and Susan have not. You would also think that Michael and Susan would be
happy with the size of their nest egg. Sill in their mid-40s, they are in the top
1 percent of wealth in the world. But they are miserable.
Michael losses sleep over his investments regularly. Though he works
60 hours a week, he finds time several months a year to shift between
$100,000 and $300,000 from one investment fad to another, believing he will
increase his returns and then be happier with his portfolio. Among the other
high-income employees where he works, this is routine practice. In fact, the
main non-work-related topic among these employees is investing. Though
not one of them has ever calculated their annual returns, they all constantly
chase high returns and lose sleep worrying about the market.
Read More : Investing is not about numbers
