Last Updated Jul 19, 2011 10:44 PM EDT
Humans are herd animals
Though most of us see ourselves as individualists who blaze a unique trail through life, human beings are by nature herd animals. And like any other herd animal, there is a feeling of safety in numbers. There is a sense of security that comes from being in the middle of the herd. So when our family and friends are raking in the bucks, as they were during the internet and real estate bubbles, it feels bad to be left out. Just as it did when each bubble inevitably popped. Nobody wanted to be the last investor in the neighborhood to get out of the market.
It hurts to lose money, but misery does love company and somehow it makes us feel better if others are losing as well. And, almost as powerful, we don't want to be the stragglers in the herd who were the only ones dumb enough to miss out on getting rich. Thus, we feel better when we follow the herd.
Being a contrarian is painful
In October 2008, the US financial system was in danger of collapsing. I can tell you that rebalancing then was the most painful experience I had ever had in investing. Buying up stocks as their value continued to plummet was bordering on the crazy in March 2009, and my wife and I were having some serious discussion on continuing this strategy.
Now that the market has rebounded and buying stocks and gold is a much more pleasant prospect, I'm selling stocks and my precious metals and mining equities to rebalance. Painful as it is to sell my winners, it's nothing compared to the difficulty I faced less than three years ago buying more losers.
My advice - do what hurts
If you're lucky, you'll live long enough to see several more market plunges. They will also be painful, and buying after the plunge will hurt more than you can imagine thinking about it today from an intellectual standpoint.
Truth is that successful investing will always come down to buying low and selling high, which means you sell your winners and buy more losers. Sure, it will hurt and, sure, you will look stupid to those who don't understand the wisdom of rebalancing. But you know what else it will do? Make you a lot of money.
Investing is simple but it sure isn't easy.
Note: Image from .adriatiko.com.