McCall’s Call: Buy-And-Ignore Is Dead

August 31, 2011

 

Selling Is The Toughest Part

Anytime investors add new positions to their portfolios, they’re typically in a state of euphoria. The stock or ETF has been on their radar for some time and they’ve convinced themselves that now is the time to buy before its price rises. There’s no buyer’s remorse and they can only envision the new position at a higher price in the future.

Unfortunately, not every position works the way the investor had hoped, which forces a selling decision. In other words, investors have to admit they were wrong, which is one of the most difficult things to do. It’s never easy for a human to admit they were wrong in any aspect of life, especially when it comes to money.

Do Not Overreact

If an investor is able to grasp the need to lighten or liquidate a position, the next problem is emotional selling and knee-jerk reactions. The investors who decided they couldn’t take watching the market fall hundreds of points every day finally gave up in mid-August.

Unfortunately for them, that was probably the absolute worst time to sell. When everyone is selling and it feels as if stocks will never rise again has historically been the best time to buy.

Taking the contrarian view to investing has been a simple strategy that has made investors billions. Just ask the most successful hedge fund managers in the world. Or how about Warren Buffett, who was buying beaten-down stocks in early 2009 and put money into Bank of America (NYSE: BAC) last week?

If there’s one strategy I’ve always followed in my life as an investor and financial advisor, it’s that I’ll never be zigging when everyone else is zagging. Simply put, when have the masses been right?

If everyone was making money, it would be too easy and, in such instances, eventually the trend ends in a bad way. If everyone is on one side of the trade, I suggest you make the tough decision and go against the crowd.

You’ll thank me in the end.


Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.

 

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