"Hurts So Good Investing"

Last Updated Jul 19, 2011 10:44 PM EDT

How do you know you are investing well? It turns out that one of the key indicators of successful investing is how much pain you feel. If your investment choices cause gut wrenching pain, this is a really good sign that you're doing something right. Let me explain.

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.
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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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