A few weeks ago, Steve pointed out that emotional trading is responsible for almost all the losses incurred by the small investor. He asked readers for their suggestions on how to stop this costly behavior, one reader’s response was brilliant. Hear what it is in today’s Two-Minute Retirement Solution.
I mentioned a few weeks ago that emotional selling and buying are responsible for almost all the losses incurred by the small investor. John Bogle, the founder of The Vanguard Group, stated in a recent Wall Street Journal article that if we can get both under control, we could triple our returns.
As promised, I am recommending what I thought was a very good suggestion by one of our readers to help control emotional buying and selling.
So here it is, courtesy of Chris, one of our subscribers:
Like all great ideas, it’s a simple one – his wife acts as a devil’s advocate. He must present to her his reasons for buying or selling any investment.
Here’s what I like about it.
First, it makes you stop in the moment and organize your thoughts. Since you would have to present your reasons to another person, it eliminates the problem of acting too quickly. It gives you time to cool off.
Don’t we all wish, at some point – not just in our investments – that we had stopped and thought through our reasons for doing something and bounced them off another person?
Second, you have to tell it to another person you trust and respect.
When you have to explain your ideas to someone, you not only get their thoughts, but you also get to hear yours. I write five scripts a week for The Oxford Club, and I wouldn’t think of recording one without having my better half, or occasionally a neighbor, listen to it.
Their feedback is helpful, but hearing myself say it out loud is the biggest benefit. I find errors I would never have found otherwise.
And third, you have to list the reasons you want to buy or sell, and they have to make sense to another person.
Anyone who has ever been married or lived with another person knows there is nothing more difficult than convincing your spouse or mate to agree to buy something. And that’s the good news. Every investment has to go through this tough decision-making process.
Emotional trading is costly. I knew if I asked you all how to curb it, one of you would have the answer. And I really think this one could work.
Oh, and obviously, your devil’s advocate can’t be a buddy who always agrees with you. It has to be someone who will question your judgment.
I really think this could help. Give it a try.
And many thanks to Chris!