Let’s first define insanity. It is doing the same thing over and over and expecting a different result. And that is what most investors do and they can’t understand why they are not able to make money in the stock market.
Do these investors need a psychiatrist, a psychologist, a talk with their minister or none of the above? I know, you think they should talk to their broker or their financial planner. Believe me, folks, these two are part of the problem and not the solution.
If they knew the answers everyone would be rich. Let’s go back and look at who taught these mavens how to invest. The Wall Street brokerage houses taught them or rather did not teach them the most basic rules of the game. Why? Because brokerage houses want you to buy (for commission) and they do not want you to sell even though that means another commission. There are two basic reasons they don’t want you to sell and it has nothing to do with that one selling commission.
If you sell you might take your money out of your account and that is one of the things the Maul Street crowd never wants to happen, but the most important is they make money when your account is invested. It is not a lot, but it in a nice steady 1% or more. You are their unspoken collateral in the worldwide money shuffle.
Any broker who suggests a customer sell is usually chastised in some way or just plain fired. A broker who allows large sums of cash to accumulate in customers accounts is told to invest (?) it or hit the road. The house (that’s the brokerage firm) does not want to see customers with big cash balances although there are times when that is exactly where they should be. Remember 2000 to 2003? During that three year period wouldn’t it have been better for your account to have had no stock or fund positions?
Brokers or financial planners are not taught simple methods to protect customer funds. And I mean simple. Too many folks during the 2000 debacle lost 40% of their money and more. There was absolutely no reason for this if basic money management techniques were instituted.
Customers could be made aware that they should not give back more than 10%, maybe as much as 15%, of their portfolio value when the stock market goes in the tank. That occurs on a regular basis. Declines in equities of 20% to 40% happen regularly and no customer should be mesmerized into holding during those periods.
During the 2000-2001 period there were less than 3% recommendations by brokers to sell and those sells were after the stock had crashed about 80% to 90%. It is too late then. Your money is gone.
If brokers and financial planners had been taught to advise people to place 10% stop loss orders their retirement accounts they would be much fatter today.
Stop doing the same thing over and over again because of bad advice. Learn to sell when your position goes negative. Don’t be one of the insane.