The hardest investing skill to learn: WHEN TO SELL.
I sell my winners too soon. I pat myself on the back for being a genius when I make a 20% profit and then watch the stock that I just sold go up 20% in the next week. I have never been good at factoring price momentum in to my thinking.
I also hold my losers too long. I find it hard to admit a mistake and take a loss. I keep hoping that something good will happen. Sometimes it does. Often, it does not and my investment keeps dropping in price.
Years ago, I started buying ETF bundles that follow a strict investment style to overcome some of my investing challenges.
The good news for me is that I am not alone. I share these psychological biases with many. This is the primary reason that The Roadside Scholar recommends that individuals invest in bundles: the investment decision making is automatic.
The individual only has to decide on the strategy to employ – market bundle (indexing), value, momentum, fundamental indexation, etc. – and find the appropriate ETF bundle. Each year the managers of the ETF bundle purchase stocks of companies that meet the stated criteria and sell ones that no longer do. This is called rebalancing the portfolio.
ETF bundle rebalancing automates the purchase and sell parts of the investment cycle, eliminating human emotion and psychological biases from the process. Doing so has delivered better and more consistent profits to investors over time.
Employing ETF bundles also enables the individual to maximize the financial benefit of compounding (Profits on Profits in Roadside Scholar language). By using an ETF bundle, the investor effectively never sells (minimizing taxes and transaction fees) while getting a new portfolio at each rebalance point. This is my favorite aspect of investing in ETF bundles (in taxable accounts).
Roadside Scholar Tip: Never Sell. By using a portfolio of well-structured ETF bundles, the investor never has to worry about the timing of selling an investment.
For more information and easy to understand explanations of important money matters go to www.theroadsidescholar.com or purchase The Roadside Scholar: Amazing Money Lessons from Behind the Fence.