Am I a good investor? Part II—putting the odds on your side.


Last blog we went over some daunting statistics on picking individual stocks. Check it out if you need a refresher.

So, what should an individual investor do? How does one avoid becoming a statistic; one of those for whom the markets seem to take away more money than it makes? May I suggest that when investing, we generally have three broad options: invest emotionally, buy and hold, or have a strategy.

Emotional Investing. Unfortunately this is what most individual investors do, especially those without a financial advisor. Study after study bears this out. Emotional investing is where we get excited about stocks after they have risen substantially and sell them after they have dropped a lot. Buying high and selling low is a sure recipe for poverty. So my first recommendation is if this describes you—STOP! Hire a financial advisor who can help you invest with discipline.

Buy and Hold. This is where you invest, perhaps in a passive index investment, and hold it through thick and thin. This can be ok, especially if you are young and continuing to accumulate assets. But if you are getting close to retirement, retired, or simply have substantial wealth, this can be fairly dangerous. Remember that it took the market (as defined by the S&P 500 index) until 2012 to eclipse its previous high of 2000. During this tough 12 year period the market had two devastating drops of about 50% each. If you had to draw on your investments during this period, you likely still haven’t broken even. Buy and hold can sometimes seem buy and hope.

Have a Strategy. There are lots of strategies that can potentially improve your chances in the market. Step one is hire a good financial advisor to help you devise and implement a strategy. What sort of strategy? Well, perhaps buying, like Benjamin Graham said, stocks that have a “margin of safety.” Or, having a very broad global asset allocation so that your risk is more diversified may be an option. Or having a rules-based buy and sell discipline may be the strategy for you. Or you may prefer a combination of strategies.

The point is to invest intentionally; don’t just pick a stock or an indexed investment out of a hat.

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