Bear Mountain Bull

Those who watched their portfolios collapse in this bear market obviously learned nothing in the last bear market, which began less than eight years before the start of the current bear.

Instead of being the deer in the headlights, use the experience to your advantage — and don’t let it happen the next time.

From Danielle Park:

Through my blog I receive reader mail daily from those who have lost heavily and are now feeling lost and depressed: “I am sickened by my losses” says one writer, “I have not been able to sleep well in many months” says another. “I am revolted by the financial industry and its advisors “salesmen” who sold me a bill of goods and left me to pay a heavy price” writes another: “I feel like a fool. I feel betrayed. I feel mad. I feel embarrassed.” And most common of all lately, I hear this: “How can I get my losses back?”

A desire to make back one’s losses is understandable. But investing with this motivation is inherently dangerous; more likely to compound rather than recoup losses going forward. There is desperation in this thinking. Desperation is the arch enemy of reasoned and objective investment policy. Investment strategy must be designed with a responsible risk exposure for a given person, account, and market environment. We cannot force markets to give us what we demand. The first step is to acknowledge past mistakes; the behaviour and strategies that took one down the wrong path.

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As airlines instruct us, it is important to plan exit routes before our plane takes off. The right question from here is not “how can I make my losses back,” but rather “how can I avoid suffering large losses the next time?” The market recovery will come, and gains will follow. And then there will be another bear. Knowing our exit strategy in advance is the key to lasting success.

Investors that take the time to objectively define conservative asset allocation limits as well as their buy and sell rules for risk assets are less likely to succumb to over-holding and the next bubble mania. The happy outcome from financial pain is always the same. Those who use the experience to change their behaviour and approach can profit from it for the rest of their lives.

There’s the ‘S’ word again — Sell. You need to learn how and when to sell.