“Every great power is dangerous for the beginner. You must therefore wield them as you are able, but in harmony with nature.” —EPICTETUS, DISCOURSES, 3.13.20
The worst thing we all do is bet big when we think we have the game figured out. Whether it’s at the roulette table or the stock market, when we win early we all get a little full of ourselves. It’s human nature. We quickly think it’s our lucky day, or worse, we are a natural. Then we proceed to up the ante, “You have to bet big to win big!”
Eventually the tide turns, we lose and walk away more pissed off than ever.
I have seen this first hand with clients who make some quick money in the stock market. With early successes, they think investing is easy and want to double down on their next pick. I usually have to help them cool their jets and explain that it’s not that simple and while its ok to make some individual stock investments its not wise to rock the entire retirement portfolio that way.
Or the other thing happens, they look at an Amazon or Netflix and tell themselves it was so obvious that they were going to take over the world…..If only I invested $$$$ in them, I would have millions today! They feel so guilty that they missed out on a huge opportunity that they want to bet big on their next stock pick!
But in reality to get where they are today both companies experienced major declines along the way. And will probably experience declines again in the future. It’s not the straight line up they think it is.
And what do you think the average person would do during those declines…SELL.
Even if they know what the companies will grow into, the average investor will still…SELL.
Why, because we all want to stop any pain we are feeling as quickly as possible. And to see the value of one’s’ portfolio down 30% or 40% is very painful. The only want to stop the pain is to take an action….and that action is to sell.
Looking backwards, you might tell yourself, no, not me, I would have held on. Yeah, well I was being kind before, the real numbers are that between Dec 1999 and October 2001 Amazon stock fell 95%, YES 95%!
$100,000 = $5,000. Think you can ride that all the way down without taking any action? Be honest!
I want all of my clients to make money and grow their net worth. But time and time again I have to correct behaviors of those people who have had early successes or have made up successes in their mind..
There is nothing wrong with making some stock picks and if you need to get it out of your system we typically say 2-5% of one’s portfolio is an acceptable amount. You can have a taste, but not a whole meal.
Ultimately the best way to invest for your future is to build a properly diversified asset allocation portfolio based on your risk tolerance and time horizon. We don’t want you to gamble your future away. If you need more excitement in your life find some new hobbies. Your retirement portfolio or your kids college fund is not the place to find the action.
If you are looking for investing help, let’s connect today!
-Jared
