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I really hate losing when it involves money -- especially in the stock market. If I've done my research diligently and chosen my selections carefully and I still find myself losing money, I can get really disheartened.
A quick look at the market year-to-date reveals that many investors might be losing money. Even though the high-flying Nasdaq is up 20.59%, the S&P 500 is down 5.83, while the DJIA is down 13.48%. Ouch! It's possible your portfolio is looking more like a ski slope than an airplane takeoff.
To make matters worse, if you hang around any investment community, wounds will ache when confronted with chatter such as "I moved all my money into high techs 14 months ago, and now my portfolio is up 400%." Or "My position in JDS Uniphase is enabling me to retire early."
What's a hardworking investor to do when experiencing the temporary setback of short-term portfolio losses?
1. Think Long Term
As long-term investors, we expect months, maybe even years, of underperformance. By keeping eyes focused on the long term, temporary setbacks will be minimized. As long as your portfolio is chock-full of excellent businesses, you needn't worry about short-term fluctuations.
Many times, a depressed portfolio will be the result of market sentiment when a particular sector is out of favor. Momentum causes short-term fluctuations that can temporarily cause the best portfolios to look like yesterday's stew. But in time, the very same companies again become the darlings of the market. As the old saying goes, "Everything old is new again." By holding long term, you'll be there when momentum returns in your favor.
2. Take Responsibility/Don't Blame Others
It's easy to blame someone or something else when things don't go the way you planned. Greenspan's interest rate policy, the presidential elections, Howard Stern's very existence -- they are all vehicles that can be blamed for an underperforming portfolio. Blaming others gets you nowhere. Only by accepting full responsibility for every investment you make do you have the power to be successful.
If you write down the goals you have for each and every investment at the time you commit your money, you can always refer to them in turbulent times. If the business fundamentals are not the cause of a falling stock price, there is probably no need to make any changes. If a company is undergoing fundamental problems, however, it may be time to re-evaluate your position. Having your original goals will make such evaluation easier.
3. Stick to Your Goals
Many investors experiencing portfolio setbacks rush to sell underperforming stocks in search of sectors that have momentum. There is no guarantee, however, that you won't be transferring your cash just as momentum has peaked and cash is ready to flow back into the industries you're selling. Think of a dog chasing its tail -- the harder it tries, the more frustrated it'll become. And the dog will never catch it, because it's always in motion.
Stick to your goals of investing in good, solid businesses. Their day will come. Don't panic if the stock market temporarily delegates the stock prices to the doldrums. Well-run businesses will rise again.
4. Diversification Works
Think of your portfolio as a team of stocks. When building a team, it's essential to have diverse yet complementary elements if you're going to succeed. The Los Angeles Lakers haven't embarked on their 19-game winning streak by having an entire lineup of Shaquille O'Neals (that's a frightening thought!). A balanced team has offensive specialists and defensive specialists.
Same goes for your portfolio. If you stay well-balanced, no single setback will significantly hurt you. A portfolio that's a well-blended combination of index funds, Foolish Four stocks, Rule Makers, and Rule Breakers is the best path for long-term market success.
We're all going to lose sometimes. That's reality. Many successful winners have stated that their losses made them stronger, because losing gave them the opportunity to reaffirm their goals and make necessary changes.
Still, I hate losing. But by understanding what causes my losses, taking responsibility for righting the wrongs, and sticking to my long-term goals, my losses will ultimately make me a winner.