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Business // Thinking Smart
David S. Chang

Principles of Long-Term Investing

This is part 3 in a series on the principles of long-term investing. 7) Learn from your mistakes! It is important to never stop learning. The words “this time is different” are costly in investing. One of the key differences between successful long-term investors and those who are not is that successful people learn from their mistakes and commit to never making them again. Even when a mistake results in a large loss, take a step back to review what led to the loss and take steps to ensure that you avoid the same mistakes in the future. Don’t compound the errors by taking bigger risks in an effort to recover your money. Many people throw good money after bad, in hope things may change.

Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will confront the challenges of overcoming fear and greed. Fear can cause you to run for the exit when markets decline or your portfolio takes losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big gain.

However, by recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline. Working with a financial professional can help you stay focused, avoid emotional decision-making and many other pitfalls commonly encountered by amateur investors. In today’s world of high-tech investing, major financial decisions are only a click away and investors pay a high price for short-term thinking. 8) Aggressively monitor your investments, or pay someone skilled to do it.

Daniel Peters at WealthBridge Inc. in Honolulu states, “If you have no knowledge, no desire, no time or a combination to manage your investments, it is wise to hire a professional to help. If you think hiring a professional is expensive, wait until you hire an amateur.”

When markets are rising and amateur investors are doing very well, it’s easy to forget that protecting your assets during declining markets requires skill, discipline and constant attention. Investors need to expect and be prepared to react to fast-moving markets. No market rally is permanent and no decline lasts forever, meaning that there are no investments that you can buy and forget about. The pace of change of today’s markets is too great for investors to be complacent.

For example, the 30 companies that make up the Dow Jones Industrials, which are some of the largest publicly traded companies in the U.S., have changed numerous times since the Dow’s inception in 1896. These companies were removed as they declined, were acquired, went private or simply went bankrupt. Investing with long-term assets is not child’s play, since most investors can ill afford to lose their nest egg.

Achieving long-term investing success is challenging and requires discipline, diligence, patience, time and skill.

While it’s not possible to predict future returns or market movements, it is possible to develop strategies that lower risk and place you in the best position to achieve reasonable returns.

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