source article: Steve McDonald
It never ceases to amaze how many retirement and investing related articles the financial press can put out on a daily basis. Whether the article title is "Saving for A House Deposit" or “How to Make Your Retirement Better,” “How to Retire Early,” “The Two ETF's That Will Solve All Your Problems.” The list is endless.
Virtually all of them talk about saving more, spending less, downsizing, having a plan, diversifying… You know the gig. They’re all very similar.
But very rarely do you ever read articles mentioning the two behavioural traits responsible for virtually all the losses small investors incur…herding and risk aversion.
A majority of small investors performance can be summed up only one way…we stink at investing. Among many reasons this is the ground that passive investing is gaining good traction.
The reason? Risk aversion and herding, plus the fear of losing money and investors’ tendencies to follow the crowd. There is a mountain of research that proves that these are the biggest death traps for investors. Yet, to date, these challenges seem to be impossible to overcome.
Year after year after year, we watch the private investor wait until the top of the market to buy. He does this because he sees increasing stock prices as an indication of safety. This is what’s known as “risk aversion.” Next, he watches all the other uninformed individual investors rushing into the market for the same reason… and he mistakenly takes that too as a buy signal. That’s “herding.”
And when the next sell-off hits the individual often falls into the next phase of risk aversion. He’ll hold his overpriced stocks all the way down. Then, and only then, will he sell. And as the research tells us, it’s always at the bottom, and it’s always for a loss.
The little investor has the whole thing backward. The simple fact is sell-offs are a fact of life. And if you’re going to invest, you must plan and prepare for them.
As someone saving to gain a foothold the way to prepare for volatility is to own stocks and bonds you can continue to hold through predictable dips and valleys in the market. Selling into them is insane! Own only high-quality stocks or your favoured ETF/Fund that will be there – and will pay their interest and principal (or dividends) – no matter what the market does.
These are companies that will bounce back when the turnaround happens (which it always does) and go on to new highs – which always happens too.
There are always opportunities in the market. However they’re going to work out only if you stick with your ironclad plan and thinking. That’s what you’ll need to ride out the next storm, rather than cutting and running at the bottom.
Prepare yourself now for when the blood is again running in the streets. It’ll happen. And maybe you can be part of the few who will watch, rather than participate in the losses.