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“Leader of the Pack” Investing
November 1, 2012
There is only one fundamental rule of investing, buy low and sell high. As a financial advisor, I see many people do just the opposite when left to their own devices, and buy high and sell low.
A good time to invest is when you cannot see any reason for optimism. For instance, the public media is talking about the sky falling. Your neighbors are all talking about putting all of their money in the mattress or burying it in the backyard. Brokerage statements are being delivered with “brackets” around the numbers, indicating losses.
Your gut asks you “why are you throwing your good money after bad?” when continuing to buy as the market goes down.
A bad time to invest is when you cannot see any reason for pessimism. The market goes higher and higher for no apparent reason. When the reason to invest becomes “because the market is going higher”, it is a time for caution.
I liken this behavior to a “teeter-totter” or “see-saw” (they used to be on every playground, for those of you too young to remember a world without “plaintiff attorneys gone wild”) investing, the playground apparatus on which one side goes up as the other side goes down.
Imagine a giant see-saw, on which the general public stands, able to move freely from one side to the other.
When the general public runs in one direction or the other, the balance tips in that direction. Humans are much like other herd animals. When one sees a “leader” heading in one direction or another, others tend to follow (the general consensus is “he or she probably knows something that I don’t”). By the time the entire pack arrives at the leader’s destination, they find themselves crowded on the “wrong” end of the teeter-totter. They see that the other side of the spectrum (teeter-totter) is now the place to be (“the high side out of the mud spot that invariably develops under each side of a see-saw”). So, then they run in that direction, hoping to be first.
The picture of successful investing is trying to stay in the middle of the teeter-totter, by attempting to diversify assets among all types of assets: real estate, business ownership, talents/ideas/patents, and stocks and bonds.
By remaining “in balance”, one is less prone to panic, or “to run with the herd”. One can also remain in balance by putting some safeguards in place to limit losses, such as using stops, setting limits, and/or using option protection strategies.
Remember, following the leader of the pack will only get you to the leader’s destination after he or she gets there.
Find trusted advisors to help you determine your own destination. Then use their guidance to create a plan that can help you to achieve your own goals, rather than living with the results of running with the pack.