I love the show The King of Queens starring Kevin James. There is a great episode called “Net Prophets” where Doug (James) and his wife Carrie receive a Holiday bonus and decide to invest it on their own in the stock market. Carrie’s co-workers have been talking about how much money they have been making in the stock market and Doug and Carrie want to get in on the action. Long story short, after investing the money Doug can’t sleep, and is constantly logging on-line to check the balances. At one point he says something to the effect of: Carrie, we are long term investors, we will hold these stocks for at least two weeks!
Doug and Carrie are clearly not long term investors; they have just heard someone on a TV commercial say those words and it sounded cool. At the end of the day they didn’t understand what it meant to buy and hold an investment and they were not in for the long haul.
When Doug and Carrie invested in their Holiday bonus they were engulfed in the second reason why individual investors often underperform. Doug was fearful the value of his investment would decline or fluctuate. He was afraid that they would lose some of the $3000 they invested. They clearly had not taken an inventory of their risk tolerance and were investing in areas where they were not comfortable. By building a diverse portfolio of equity, fixed income and cash investments Doug and Carrie could have minimized the volatility in the value of the portfolio that they feared.
Expectations are one of the single most under addressed issues when it comes to investing.
Doug and Carrie had some pretty unrealistic expectations for their investment. They had been hearing stories from co-workers about doubling account balances, massive returns on small investments, and even early retirement.
When the value of their investment account wasn’t jumping through the roof, Doug and Carrie started to question their investments and ultimately made the knee-jerk decision to sell their securities too soon. They didn’t have realistic expectations! Short of winning the lottery, nothing could have satisfied Doug and Carrie – they were looking for a get rich quick scheme!
Here is what it comes down to:
It’s not about picking the right stock, buying or selling at the right time, or even having the best analysis on an investment. Successful investing comes from developing habits that will enable you to stay the course and truly be a long-term investor.
It all starts with being honest with yourself about your risk tolerance, return expectations, and time horizon. You are unique! If your brother-in-law, who has a cast iron stomach, invests in commodities, options and emerging market stocks – that’s O.K. you can be different. Take an assessment of your risk tolerance by asking yourself a few basic questions:
- How will you feel if your account value fluctuates from day to day or month to month?
- How long until you plan to withdrawal the money you have invested?
- If your account dropped in value by 25% how would you react?
Having realistic expectations for the performance of your account is essential as well! Have a discussion with your advisor about what you should expect from your portfolio, having this type of open conversation will enable you to have a better understanding of reaching your long term goals.
You have to stay the course. It’s more than just saying – it’s doing it!
Too many people started to fold up shop and get out of the market during the first part of 2009. These folks immediately realized their fears and took steep losses. If they had only stayed the course they would have recovered much of the lost ground over the last two years.
Be honest with yourself and you can be a better than average investor!