There remains a pernicious myth among the public about investing. Many believe investing to be something that – with the right skill and/or luck – is fun, exciting, and painless. Thoughts of stocks and bonds often are accompanied with sky scrapers, expensive suits, and luxury cars. There is a certain element of truth to this, of course. Many in the industry have profited (both in fame and fortune) from their investment success. And we do hear about those that made a fortune off of this stock or that investment.
These stories, however, muddy the waters of what it takes to be a successful investor. They provide a thin veneer covering of an altogether different reality. The truth about successful investing is actually much more uncomfortable – much less glamorous. Very few discover what the reality of investing is like; even fewer act on it. And why? Because successful investing is painful.
If it feels good, don’t do it
One of the rallying cries of American culture is immediate self-gratification. We like fast food, fast entertainment, and fast-forwarding. And we’d like it now, please. Conversely, we shy away from unnecessary discomfort – even if we know it’s good for us. There’s a reason gym attendance declines in February every year. There is a reason your city has only one library (maybe) but Netflix in every home. There’s a reason so many Americans have a car loan and empty bank accounts.
When it comes to investing, the temptation is to desire the same immediate satisfaction. If you were asked to choose between investment “A” and investment “B”, how would you know which to choose? Of course, you think, the one that has done better recently. That feels right. It’s easy.
There’s only one problem: it’s wrong.
This graph compares the performance of three different investment strategies from 1999 to 2013. If you follow the blue line, you’ll notice that buying recent winners is quite destructive to your investment returns. If you consistently bought the best recent performer, then you consistently lost money. In other words, if you made investment decisions that feel good every year, then you lost money. Have you ever wondered why your investment decisions always feel right, and yet your investment returns always feel lousy? Well wonder no more. Buying current winners is a losing strategy.
If it feels wrong, maybe do it
There is something else to notice. The red line demonstrates what happened when buying recent losers. As it turns out, if you consistently bought recent losers, then you consistently made money. In other words, making investment decisions that feel wrong can often lead to investment returns that feel great!
Now to be certain, sometimes investments are declining because they are actually bad. Blindly buying declining investments is not always a winning strategy, either. Making wise investment decisions require more prudence than that. But the point should not be lost: successful investing involves – more often than not – making decisions that don’t feel good.
We at Plan Financial concern ourselves more with accomplishing our clients objectives than with feeling good about our investment decision. We say it all the time: successful investing in painful. It’s painful because it requires selling investments that have done really well, and buying investments that have done poorly. These actions don’t feel good, but they must be done. They must be done consistently. And they must be done with conviction. This isn’t easy, and it’s why so few investors follow this strategy. It’s also why so few investors taste success.
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Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material contains the current opinions of the author but not necessarily those of Plan Financial and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Plan Financial is a trademark or a registered trademark of Plan Life & Wealth Management, Inc., in the United States. © 2017, Plan Financial.