This is part of a larger article called The Golden Rules…
During long bullish periods, many investors quit learning, stop adjusting their investment strategy, and lose touch with the current market and economic conditions. Eventually, every portfolio will need adjustments. For example, a value investor may hold a stock that has become a growth stock or whose fundamentals have drastically changed, an Index Investor may not have noticed that an ETF has a much higher expense ratio or a momentum investor may no longer be paying attention to risk management when the next market correction occurs. These are painful lessons to learn and unfortunately, most people have to learn from it (or fail to learn from it) over and over again. Diligence is your vaccine.
Why does this happen? Human nature. When you find a strategy that works over a long period of time ranging from a few months to several years, depending on the investor, you tend to gain a lot of confidence in your investing ability. While confidence is an important trait for an investor, it tends to settle you into a comfort zone. Many people have asked, “are you just saying that people shouldn’t get over-confident?” No. My point relates more to getting confident enough to slip into a comfort zone than a distinction between confidence and over-confidence. We are all guilty of this, it’s a normal reaction.
The first side effect is that you will stop searching out new investing information to add to or challenge your own knowledge. When you believe you already know enough to invest well, it’s hard to find the motivation to continue seeking out new information. This leads to the second side effect. When you aren’t pursuing new knowledge, you can no longer improve, refine or adapt your investing strategy.
If you have stopped seeking knowledge and no longer adjust your strategy BUT your investments STILL do well, you will inevitably experience the third side effect. Since things are going so well with so little effort, you will begin losing touch with and interest in changing market and economic conditions. At this point you are in a complete investing vacuum, you are completely out of touch with your portfolio and with current market conditions.
No one, not even an index investor, can get away with this mistake unscathed. When you do realize your mistake, you’ll have to catch back up on everything and, as every beginner learns quickly, learning curves can be steep and painful for those that fall behind. Whether it’s reallocating to balance your portfolio or switching industries to continue finding value stocks, most strategies (good ones at least) will require some adjustments when the market and economic environments change. Because you didn’t make these adjustments when you should have, not only do you have a learning curve to climb but you’ve already experienced losses that you could have avoided.
So how do you avoid this? The most successful approach I know of is to discuss a wide variety of investing topics frequently. Don’t worry if you’re a beginner and don’t know many investors yet. Finding people to talk to is as easy as a Google search, you’ll be shocked by how many options are readily available. Want to check for yourself? Try searching for investing forums, investing discussion boards, or check any of the major investing sites for discussion areas. Prefer face-to-face interaction? Search your local area for investing clubs, free investing and personal finance seminars (meet other investors), or just talk to your friends, many of them may appreciate sharing the new knowledge you’ve picked up and will try to return the favor.
Here at my blog and at other similar sites, you’re learning a lot about investing, but when you interact with others on a more personal level you get to hear real life experiences. Absorbing the wisdom and knowledge of experienced and successful investors is a great way to learn, you can’t beat on-the-job-training. When you are a more experienced investor, it’s also fun and fulfilling to teach others and this reinforces your own knowledge. Interacting with others provides a fresh perspective, pushes you to continue learning, and sometimes even provides new insights that you can incorporate into your own investing strategy.
Best of luck and please add your thoughts to this post, we’ll all benefit from your questions and insights.
Back to main article, The Golden Rules…