“Profit Taking” vs. Performance Chasing

Monday, December 16th, 2013

If you listen to, watch, and pay close attention to financial news right now, you hear two different sentiments out there, both of which are deadly destructive to your relaxing retirement.

Given the stock market’s growth this year, the overwhelming majority of voices are on one of two distinct sides of the fence.  The first are those who see that market prices are now at all time highs (in numbers only), so we should “lock in” our gains.  On CNBC, when the market has an off day, you’ll hear the phrase “profit taking” (whatever that means) as a method of ‘explaining’ what went on in markets that day.

The rational long term investor must then ask the question, “and then what??”  Given that I’m planning to live another twenty years, and my money has to keep pace with inflation so I don’t run out of money, what do we then do with our money after selling and “locking in profits”?

The flip side of this are the novices who have bought into the notion that investing is a sport.  They look at how well one investment asset class has performed this year, measure that against the performance of some of their holdings that were not in that top performing asset class, and then lament that they “missed the boat”.  Vowing not to make that mistake again, and buying into the “trend” notion of investing, they then move all of their investments over to that investment class that just performed brilliantly.  In short, this is known as “performance chasing” and it’s equally as destructive as the desire to “lock in gains”.

When your goal is to produce continuous lifestyle sustaining income, successful investing in retirement does not require you to know when to be “in” and when to be “out” of financial markets.  It also doesn’t require you to hit ‘home runs’, i.e. owning the top performing investment every year.  This has been proven over and over if you study history.

The solution, as subscribers to The Relaxing Retirement Formula™ know, is a clear understanding that financial security and confidence is earned by having a disciplined, long term ‘ownership’ mindset, and by owning pieces of carefully chosen great companies in broadly diversified categories.

Does this insulate you from periodic, short term price “corrections”?  No.  Price corrections are normal and to be expected as part of the long term investing process so when they occur, they don’t require panic driven reaction.

As we close out another year together, feel proud that you haven’t wasted your time participating in either of these destructive activities and, as a result, you’ve reaped the rewards of a disciplined, long term ownership mindset.