Successful investors have a system. They have rules that they follow and that they don’t deviate from. Take Warren Buffett. In the 1990’s, he did not get into the Internet companies. People thought he was nuts. And what happened? The Internet bubble popped. Now, Warren’s back on top, well ahead of where he was back in the 1990’s when he seemed like the only person not making money on the Internet.
When I ask folks about their stock, “When do you know when to get out?” a lot people just answer, “I don’t know! I’m just going to keep it. It’s going to keep up isn’t it?” For some people, that’s their system — buy and hold or as I call it buy and hope.
But sometimes, like 2008 — that’s not the most productive way to invest your money. I heard of a lot of people who lost thirty, forty, fifty, sixty percent in 2008 through the buy and hold way of doing things.
Once you’re in retirement, your time frame is going to seem short. So to protect yourself, what do you do?
You set rules. Create and follow a system.
Number one, I always tell people, is avoid big losses. If demand is falling, it’s time to get out. Number two is to periodically take profits off the table. Generally speaking, we take profits when a position has gone up 30%. Then again when the position is up50% and/or when demand starts to weaken. You’re not in the investment to own the company, you’re in it to make money. And one way to make sure you do is to take profits off the table from time to time. Set a level – a percentage — then live by it and invest by it. And don’t deviate from it. That’s your system. That’s the best way to do anything with investments – to remove the emotion out of your investing.
We’ve kind of joked with some of our clients about being married to their stocks – even when growth stops for years and years. If it stopped, or went backwards, why do you want to hold it? It’s all because it’s an emotional attachment. You bought it because you liked it. You loved it. It did well for you. But honestly, who cares? It’s a stock, it’s a company. Move on to something else. Find something different. Having a set of rules, and setting goals for your investments, is the best way to keep emotion out of your financial life.