Why Investing Alone is Difficult

It is interesting to me when I hear of someone who is going to “go it alone” with their investment strategy.  They decide they do not need a professional advisor and start trading investments on their own.  Often, when I contact them in the future, their exuberance toward going it alone has diminished.  Perhaps because they have discovered the following reasons why investing may be difficult:

1)         You are trading against millions of other traders who typically are trying to time their trades to their advantage just like you are.  Many are highly–skilled traders who use automated computers with complex mathematical algorithms.  Is your limited experience going to measure up?

2)         You are typically trading with your hard-earned money which can cause fear or greed.  Some past studies have shown that because of these human emotions we tend to sell our winners too soon and hold on to our losers too long.  We want the winners to not go down, so we tend to quickly “lock-in” our gains.  With our losers, we don’t want to admit that we made a poor purchase decision, so we tend to hold on in hope of recouping what we have lost.

            The “herd mentality” tends to encourage us to follow market trends the same way.  The recent real estate bubble showed us how “the herd” reacted to rising real estate prices by buying at unusually high prices in hopes of reaping future gains.  Obviously, fear of loss or greed can affect our investment decisions.

3)         You are trying to predict something that is typically unpredictable.  I will give you a few examples.  The week of this writing, it was announced that Standard & Poor’s, a debt rating service, had downgraded Portugal’s debt two notches.  They also downgraded Greece’s rating to ‘junk’ status.  The stock markets reacted the day of this announcement with around a 2% sell-off.  And this was in spite of positive consumer confidence and housing numbers reported the same day.    Could anyone have predicted the Standard & Poor’s downgrade?  2nd Example:  recently a well-established company came out with excellent quarterly earnings.  This company has a low debt level, strong cash flow and good fundamental and technical signals.  But because the company gave a forward-looking forecast that was slightly lower than Wall Street’s expectations the investment was sold-off by about 5% the day of the quarterly earnings report. Could anyone have predicted this?

4)         You must truly love the market because it can break you down mentally.  We know that markets tend to be very volatile.  The stock market typically picks a theme or two each day around which to base it’s buying and selling.  You often have access ahead of time to some of the significant economic reports that are coming up.  But will Wall Street consider those reports to be significant, either positively or negatively?  If you think the market will move one way based upon these reports, and it moves the opposite way, the surprise will likely wear you down mentally.  To stay in it for the long-term, you have to truly love the volatility of and the potential excitement with the market and its movements.

5)         To be successful over time, you usually must trade with a proven trading strategy.  And you should follow your strategy consistently.  Typically one of the most difficult investing decisions is to know when to sell.  Greed can lead you to hold a winner for greater profits, increasing the chance that the investment will sell-off later on, either reducing your gains or wiping them out altogether.  But if you have a “sell-strategy” where you sell your investment any time you achieve a certain goal, such as a percentage gain, and do this consistently, you may be using a strategy that could improve your chances of success.  How many of us are disciplined enough to do this in all cases?  How many of us can eliminate fear or greed from the equation so that the sell decision is solely based on the percentage gain?

6)         You may have to accept losing trades.  If you are investing long enough, you will likely have losers in your portfolio.  To accept the loss would mean that you are willing to move your hard-earned money from the loser (and lock in the loss), in order to hopefully move your money to a more profitable investment.  To lock in the loss psychologically means to admit failure.

From these descriptions, I hope you can see that investing is often a difficult endeavor. To go against his or her human instincts, it often requires a thick skin where emotion is eliminated from the equation.  It often requires statistical, mathematical, and fundamental analysis that is often laborious and tedious.

And for those who think that they can go it alone against the millions of professional traders who are using complex trading systems, I exclaim, “You had better only be betting money that you can afford to lose.”

After the economic crises that we have just been through, that “can afford to lose” pile has probably been reduced substantially.

Opinions expressed are solely those of the author and not LPL Financial, and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Investing involves risk and no strategy can assure success. Past performance is no guarantee of a future result.

Jim Rigtrup is the owner of and a Wealth Manager with Keystone Wealth Management Group, LLC.  Sandy, UT.  He can be reached at (801) 572-1077 or at jim.rigtrup@lpl.com

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