Investing Rules
When investors are confronted with the arduous task of receiving an investment statement with asset classes that have lost money, it is often perceived as painful. The natural and hard wired response is to sell the things that are causing pain, and buy or purchase more of any asset category that may be up. Inevitably, this behavior will cause the average investor to sell the asset that is down, thus reducing the diversification in their portfolio, and buy asset categories after they are high. Rebalancing requires just the opposite; selling some of the asset categories that are relatively high and buying more of the categories after they are low. Left to their own devices, investors fall prey to this devious cycle time and time again, thereby breaking all of the rules of investing. It is an implementation problem, not a knowledge problem. Think of it like dieting. The rules are easy; following them is not. To lose weight: (1) eat less, and (2) move more. Two simple rules, but those who have earnestly attempted to apply them in their lives and modify their own behavior are quickly confronted with the very real obstacles that their own instincts and emotions present. In this respect, investing is no different. The rules are simple; following them is not. The problems that instincts and emotions create in the investing process are exacerbated by the onslaught from the media and the financial institutions, which profit from the frequent buying and selling of commission-based products.
