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Staying the Course

 

One of the most difficult aspects of investing and trading is staying with your original investment philosophy. Quite often, you will find yourself re-entering the market after a string of losses with the thought, "This time I will stick to my plan. I will not get sidetracked." It really doesn’t matter whether you are a trader or an investor; you face the same problem. Only the time horizons or events may differ.

It sounds like a relatively simple proposition to make an investment or trading decision based on a particular approach and then to stick to that plan come what may. In practice, though, it is difficult. Many people, developments, and psychological hurdles are ready to trip us up at the very first opportunity. We begin with the very best of intentions; yet so often we find ourselves changing our plans in midcourse and losing out on what could have been a very profitable investment or trade.

While it is important to stay the course, it is also necessary to remain flexible enough to change direction if the need arises. This advice may sound contradictory. In fact, it makes eminent sense, but only if your shift in tactics or strategy is based on changes in the underlying economic conditions. Most of us face quite a different problem. We set off with a plan and, after awhile, get diverted by an unexpected news event, a comment by our broker, or a news story. We either totally forget or choose to ignore that nothing has basically changed. In fact, there has been a change. It is internal, however, and has taken place in our minds. It is not an external event that will affect the outlook of our investment. Something has happened to affect our perception of what is taking place rather than what is actually taking place.

What often seems to happen is that people enter a market with the very best of intentions of following a system. They have proved to their own satisfaction that the approach has stood the test of time, and they begin the campaign with a great deal of enthusiasm. Unfortunately, they conveniently remember only the periods of good performance when they should be asking themselves how much they stand to lose if this current signal turns out to equal the worst once since the 1920s.

Failure to prepare for the worst raises expectations and leads to unnecessary frustration. When some bad news pushes prices lower, it is a natural instinct to head for the exits at precisely the wrong time. This is why it is so very important to stick to the rules for the approach that has been originally chosen. If it is a proven one, the chances are that the negative consequences of such a decision will be more than eclipsed by the benefits of Staying the Course.

 Excerpted from "Investment Psychology Explained"

 

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