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Value Creation Blog

Learn To Manage Investment Losses - Investment Management

Posted by Josh Patrick

progressWe all love to watch our investments when we’re winning (meaning making money). We even act mostly rationally when we’re winning.

The problem comes in when we’re losing or not getting returns we think we should. This is when our behavior can cause us real problems.

Why is it losses count at twice the level of gains?

The people who study behavioral economics like Daniel Kahneman will tell you that we don’t act rationally around money or investments. We take irrational actions often because we have irrational expectations.

Markets go up and they go down. In secular bear markets they tend to go sideways. We often panic when the market goes down and have irrational exuberance when markets go up. Is this a pattern you recognize in yourself? Have you been able to stop it? If you’re like most investors, the answer is no. You just get too emotionally involved in what’s happening in your portfolio.

You are not a rational person!

We all like to think that we’re rational in how we approach money and investments. The research shows just the opposite. You don’t act rationally and neither do I. We all think we know the answer. We look for the next really cool thing that will guarantee results. Too often we move some money into the next sure bet and a year or two later wish we had never made the move.

My two-week rule.

I have a rule that I use when I go to seminars. Don’t make any changes in how I do things for at least two weeks. In fact, my two-week rule means I can’t even talk with anyone about a change I want to make for two weeks. If after two weeks the idea still seems like a good one then, and only then, am I allowed to talk with others about my idea.

The same should be true for your investments. If you want to make a major change, think about it for at least two weeks. If after two weeks your idea still seems like a good one then start talking about it with those you trust. If you find agreement, move forward. If you find those you trust don’t agree with you, look at their reasons and see if the disagreement makes sense. If it does, you might want to pause before making changes in your investments.

Be an investor, not a speculator.

Don’t be a speculator. A speculator makes emotional movements. They look for a quick fix to a long-term problem. They look for finding the new cool thing that will help make them rich quickly. Wiz-bang ideas rarely if ever work.

Just look at hedge funds. They promised outsized returns. The truth is that over the past ten years, hedge funds have barely stayed up with inflation. The only outsized returns were given to the sponsors of those funds.

I’m a big fan of Jack Bogle, the founder of the Vanguard Group of mutual funds. The reason that Mr. Bogle started Vanguard was a belief that it’s almost impossible to beat the market. It just makes more sense to invest for the long-term and not churn your account. Those who do so win over the long-term. Aren’t long term wins what you really want? When you have the urge to go to the new thing stop, think about it and then think about it again. After all, it’s about your future. Shouldn’t you look at what has been proven to work?

We have a special report on the basics of investing. This report will help you learn some basics of how your investments work. To get this report, click on the button below.

Basics of Investment Management

Topics: value creation, financial planning, wealth management, investment management, risk management

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