What should investors stop doing?
Often, improving performance is a matter of ending bad habits. This is true in many areas of our lives. If we want to have better relationships, then it’s a good idea to stop avoiding difficult conversations. If we want to have better personal finances, we should stop buying major items without a plan. If we want to be better tennis players, we should stop jumping when hitting the ball.
So here is a list of bad investment habits. Any one of these could be a performance-killer.
Stop focusing on your cost-basis. The only reason to worry about where you bought an investment is when you’re figuring out your taxes. A stock doesn’t know you own it, and it certainly doesn’t care where you bought it.
Stop chasing the latest hot investing idea. Hot trends come and go. When they’re hot is often when they’re the most overpriced. Often they’re just marketing buzz-words. But even sound investment strategies fall in and out of favor.
Stop trading excessively. The market may offer nonstop action, but that action won’t necessarily help your portfolio. Excessive trading not only generates more transactional costs, it also increases the chances of chasing a hot trend.
Stop ignoring risk. A stock may be up a lot, but if the underlying company doesn’t have any earnings, it’s not going to stay that way. Similarly, bonds may be boring, but if they help you meet your needs, then boring can be beautiful.
Source: Lewis Capital Management
Stop worrying about everyone else. It doesn’t really matter if your neighbor made a pile on some biotech wonder or a social networking stock. What matters if whether your portfolio is on-track to satisfy your financial needs.
Finally, stop ignoring why. We focus too much on the what of investing—what stocks to buy, what asset allocation to have, what our investment return is. But we ignore the why—why are we investing, why do we have this money set aside in the first place. What questions engage us—why questions challenge us. Maybe that’s why we avoid them.
Replacing bad habits with good habits isn’t easy. Habits are unconscious patterns of behavior and thinking that occur again and again. It’s our habits that make us who we are. Good habits—and good investments—don’t happen by accident. They take disciplined, careful focus. Fixing mistakes isn’t very exciting or make great cocktail party chatter. But it’s a sure way to improve. And isn’t that why we’re invested in the first place?
Douglas R. Tengdin, CFA
Chief Investment Officer