Losing hurts – why it’s hard to cut the cord

Losing hurts – why it’s hard to cut the cord

Dave Rae

For many of us, it can be difficult at times to admit when we are wrong. How many fights between couples escalate because neither are willing to back down and admit they are wrong? You can argue the point until you’re blue in the face, but sometimes you just have to face the cold, hard truth: you just might be wrong.

As an investor it’s also a difficult admission to make. Instead, it may be easier to convince yourself that rather than making a mistake, it’s just going to take time for your decision to come good.

Consider the example of Sam who at the start of the year was reading the experts’ stock tips for the year ahead. Four out of five of the experts tipped a new technology business, ITN to be one of the best performing stocks. That sounded like a pretty good reason to invest for Sam so he bought $5,000 worth of shares. Six months later and Sam’s investment has halved in value and is now worth only $2,500. Sam is holding on to the shares hoping they will get back at least to their original value. Making it worse is that while he thought he had a good reason to get in (based on the experts’ pick,) he had no plan for when to get out (now it is just to not lose money). If Sam sells now he’ll have to admit to himself he was wrong and lose $2,500. If he doesn’t sell, he tells himself it’s only a paper loss and avoids the truth: that he made a bad decision.

If you choose to invest in individual shares, you need to be okay with being wrong. In fact you need to be okay with being wrong a lot.

Managing your behaviour is the most difficult aspect of investing. A fund manager has a team structure and processes in place to help them keep their emotions in check. How will you manage this if you are doing it yourself?

Dave Rae is a director, owner, and Certified Financial Planner at DPR Accountants and Advisers. He is a self-managed superannuation fund specialist adviser and works with clients to explore their goals and help them to build financial roadmaps to reach these. Dave co-founded DPR Accountants and Advisers in 2014 and has over 15 years’ experience in the financial services industry. He features on No More Practice’s The Investment Series 3 – The Philosophy Series where he provides financial advice to his client and helps him to understand his financial decision-making preferences.

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