Friday, Sept. 10, 2011 10:22 AM – Do Not Fret

Each morning before I start work I spend some time alone with the Lord. It has a myriad of benefits, not least of which is that it calms my soul and puts me in the right frame of mind for the day.

This morning I read, “Do not fret; it only leads to evildoing” (Psalm 37:8b). I have seen over the years that this is good advice for investing, if you will allow me to apply evil-doing to counterproductive behavior and underperformance.

Investors have to fight two fearful temptations. The first is to overly fear losses; the second to fear missing out on gains.

Now on the first, I do have a sell discipline to prevent losses from turning into big losses. That is essential and prudent. But, especially since 2008, worry about losses can dominate thoughts to the point that technical charts become consuming and short-term market timing seems like a good thing. It is not. No one can do it well; those who fall for that siren song experience a decline in performance.

On the other hand, investors can worry that the northbound train is leaving without them. They get this idea when the market has suddenly shot up several percent and has gotten overbought. The result is that profit-taking sets in just as they get on board and they end up with a short-term loss.

These issues are magnified during times of extreme volatility, as we have now. The right approach is five-fold:
1. Step back to a longer-term view, declining to focus on short-term pops and drops and the next economic report. If you subscribe to short-term oriented newsletters or sites, get rid of them. Turn off CNBC and Bloomberg.
2. Assess your capacity for volatility and reduce your risk exposure during times of high volatility if you can’t handle it emotionally
3. Let someone more objective manage your money according to your goals and overall investment personality. Make sure they’re compensated by fees only, not commissions on trades. That is where I come in.
4. Make sure your adviser has a sell discipline in place
5. Invest your emotional energy into things more productive and satisfying

It is impossible to buy low and sell high when motivated by fear. A good investor holds his nose and buys when things are bad and sells when people are excited. As Jimmy Rogers, the great hedge fund manager that built George Soros’ fortune said, “I sell euphoria and buy panic.” That’s good advice. Emotion, especially fear is the great enemy of sound investing.