Every valid investment strategy goes through periods of under-performance (relative), or draw-downs (absolute). The question is how you deal with it. One key characteristic of frustrated investors is that they jump from strategy to strategy. The first sign of weakness forces these weak hands to jump ship at just the wrong time. In short, following a strategy is easier said than done.
Ben Carlson at A Wealth of Common Sense also notes how our fear of losses, or loss aversion, affects our ability to invest successfully. He writes:
Crashes, corrections, draw-downs, losses, system resets or whatever you want to call them are a feature of the financial markets, not a sign that they are broken. These things have to happen every once in a while for the system to function properly and wash out the excesses. It makes sense to learn from them and you definitely have to mentally prepare yourself for dealing with losses. But the infatuation with down markets can be taken too far when loss aversion begins to cloud your judgement.
By way of a quick conclusion, investing isn’t any different from many of the other decisions we make in our lives. Love, heartache, winning investments, and losing positions – it matters not. Our decisions in life all filter through the same personality.
There’s an old saying: “What does every bad relationship you’ve ever had share in common? You.” More optimistically, all the good ones have the same feature. And on this St. Valentine’s Day, whether you are alone or with someone, it pays to focus on that happier sentiment.