You Must Know When to Move On
Editor's note: Superior investors learn to control themselves...
It's human nature to fall into the habit of getting attached to a stock that has performed well for you in the past. But according to Dr. David "Doc" Eifrig – editor of Retirement Millionaire – holding on to emotions for too long can lead to financial ruin...
In today's Masters Series, originally from the January 10 and January 24 issues of the free Health & Wealth Bulletin e-letter, Doc talks about how hesitating to cut your losses can be catastrophic for your portfolio in the long run...
You Must Know When to Move On
Over my long career, I've had a lot of folks ask me to handle their money for them...
"Doc, can I just give you all my money and you do all the investing?"
No, I can't do that. But I understand why people would want to have a hands-off approach. Investing can be daunting.
For starters, the barrier to entry is high. Ask people why they don't even bother investing, and they'll give you a whole list of excuses:
- Don't know how or where to start
- Not enough time
- Not enough money
- Fear of losing money
It makes sense. If you're like most folks, you don't want to spend your free time figuring out what to invest in, rebalancing your portfolio, and worrying what the market is doing each day.
So you might be tempted to either stay out of the market or do something simple like throw your money into a fund that tracks the S&P 500 Index.
But I want you to do better with your wealth...
Though I can't do your investing for you, I can do the next-best thing: teach you how to be ready to buy.
2024 was a good year for investors...
The markets didn't see any major corrections, and the S&P 500 Index climbed about 25% overall.
If you've been following our advice, you've kept your cash in stocks, enjoying their rise.
But lots of headlines are already anticipating a big correction this year. And if we get one, what will you do with your investments then?
Will you sell everything? Will you dig in and buy more stocks? Or worse, will you hang on to some real losers and refuse to let go?
Unfortunately, plenty of people choose that last option – obviously the worst of the three. It comes down to something called "loss aversion." It's the idea that losses have a larger psychological impact than gains of the same size.
Think of a coach who says, "I like to win, but I hate to lose."
It's a human response. We hate to lose... especially money.
But loss aversion doesn't just prevent us from cutting our losses. It can even prevent gains.
For example, macro research firm Dresdner Kleinwort Wasserstein surveyed 300 fund managers and presented them with a hypothetical...
You are offered the following bet. On the toss of a fair coin, if you lose you must pay £100, what is the minimum amount that you need to win in order to make this bet attractive to you?
In a perfectly rational world, even just £101 would make for a good bet if you could make it repeatedly.
But the fund managers wanted almost double that... an average of £190. They weren't willing to risk a loss unless the money was far in their favor. It turns out, people dislike losses about two times more than they enjoy gains.
This applies to investing as well...
We've all held a stock that's headed down. And we've all – at some point or another – kept holding it in the hopes of breaking even. We'll tell ourselves, "If it could just get back to my buy price, I'll sell it and move on."
That whole time, you've got your capital tied up in a stock that the market has soured on. Meanwhile, other stocks are shooting up left and right and would be a better use of that money.
But many investors become emotional – unable to cut their losses and move on.
The data proves it, too...
In a seminal study by Terrance Odean of the University of California, Davis, an analysis of 10,000 individual brokerage accounts found that investors held losing stocks for a median of 124 days versus a median of 102 days for winning stocks.
This shows we're not only too slow to sell our losers, but too quick to sell our winners – for fear that we'll give back some of our gains.
And more recent studies have revealed a very interesting detail... While investors of course don't enjoy losing money, they're more OK with those losses if their neighbors lost even more.
Researchers out of Duke University found that folks are happiest when they lose less money than the guy next door. This is especially true for people with a lower income living in a wealthier neighborhood – struggling to afford the best cars, houses, and more. It weighs heavily on them, and they tend to follow the crowd more... particularly when it comes to investing.
It's "keeping up with the Joneses" in finance form.
This year, I don't want you following what your neighbors do. I want you to invest smartly – especially for timing when to buy and sell positions.
So I just went on camera to share one specific place you can put your money that offers a safe and simple way to rake in profits...
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Doc recently hosted an online presentation to reveal one simple move you can make that could lead to huge gains this year.
By investing in this under-the-radar opportunity and escaping the herd mentality, you could double your entire portfolio.
If you missed its unveiling last week, click here to watch the full replay.