Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re an aggressive or a conservative investor, these weekly updates are designed to give you specific investment advice and stock investing tips. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.
Today’s tip: “It’s easy to assume that frequently-quoted investment rules are based on successful experience, but they can often prove to be misleading and harmful.”
Most investor sayings or rules have some truth, logic or value to them. That’s why investors keep repeating them until they become investment clichés. A cliché can be based on truth – that’s why it is repeated so often. But the truth and logic of any given saying may be irrelevant to your investment goals, particularly if you are a conservative investor.
How one investment ‘rule’ could wipe out your profits
The value of investor rules or sayings may be psychological rather than financial. Still, there is always a risk that they could override your best judgment at precisely the wrong moments, and lead you to do things that undermine your investment success.
Here’s an example of one often-quoted saying you may have heard with stocks that have moved up following the market downturns of the past few years: “You never go broke taking a profit.”
This is true only in an extremely narrow sense. The act of “taking a profit” (or selling an investment at a higher price than you paid for it) certainly won’t, in itself, put you into bankruptcy. However, investing would be easy if all you had to do was avoid going broke.
Finding a financial advisor you can trust
Many people tell us that finding an advisor they can trust is one of the biggest problems they face as investors. Too often they’ve had advisors who apply the wrong rules to their investments, frequently for reasons of self-interest.
That’s one reason why I offer personal portfolio management advice to a private group of investors, my Wealth Management clients. We tailor your portfolio to your own situation—your specific goals, temperament and financial situation—not to any investment “rules” that are liable to do more harm than good.
In our view, your goal, particularly if you take a conservative approach, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or losses.
Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return. This is where the cliché becomes dangerous: If you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.
On occasion, you may succeed in selling just prior to a major downturn, and buying back at much lower prices – you’re liable to see misleading tips that suggest you do just that. But our view is that you will rarely be successful. More often, prices will soon hit bottom and begin to rise. If you buy back, you’ll pay higher prices.
Our investment advice: No one can consistently predict market downturns. In hindsight, market downturns are easy to spot. Spotting them ahead of time is much harder, and impossible to do consistently. After all, if you could consistently spot market downturns ahead of time, you could acquire a large proportion of all the money in the world, and nobody ever does that.
The problem is that you’ll foresee a lot of market downturns that never occur. All too often, the market-downturn clouds disperse soon after skittish investors have sold. Good reasons to sell do crop up from time to time, of course, even if you are investing for the long term. But “you never go broke taking a profit” is not one of them.
Tomorrow in Best U.S. Stocks we report on an energy company that got a positive shakeup from an activist investor.
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