Emotional Investing

By the time you finish this book, you will have decided that I am obsessed with the idea of emotional investing.  This is probably the leading cause of investors losing money in the markets, and I want to haunt you any time you hear the market is down, and you think of selling.  We will develop some important aids in the balance of this book.  I want you to develop a sufficiently detailed investment plan that you are thoroughly convinced will work over the long haul.

I need you to understand the risks that are out there, and how those risks will affect your investments.  To demonstrate the diversity of market investing, I have mentioned many different investment strategies and styles.  I have discussed the idea of a mad money portfolio, and I hope that you will give this learning tool some serious consideration.  But in the end, I want you to put the bulk of your savings into an ironclad portfolio that is diversified within and between asset classes and allocated in such a way that your risk is well understood.

In bull markets, you may be a little envious (or a lot) that your colleague had a 23.5% return last year, and yours was “only” 11.7%.  I want you to understand what kind of risk she took, and be comfortable with your decision to trade some potential profits for enhanced security.  When you look at your portfolio, I don’t want you to look at your offsetting investments and want to sell them because they kept your return low.  I want you to understand that those laggards are your insurance policy for the lean times ahead.

I am content if you decide to build an aggressive rebalancing strategy that buys losers when “blood is running in the street” into your investment plan.  Such plans must be exactly that—part of your plan; you cannot sell all off your bonds and dive into tech stocks on a whim.  In fact, I suggest you write a formal plan for yourself, just like a mutual fund prospectus.  Explain how you will invest, what your strategy is, how you will rebalance, and so forth.  Do not execute any trades that are not part of the plan, ever.  If you realize the plan has a weakness, then rewrite the plan.


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