One of the problems with the person who proclaims to be a regular saver, they usually still has a tinge of greed. Please allow me to explain –
Let’s say for example Mrs. Saver who does all the right things in terms of saving for retirement. She has money in CD’s, Treasury backed money market funds, and other safe investments. She participates in her company’s retirement plan and also has a portfolio that is well balanced with traditional stocks and bonds. She claims to be a regular saver, but is willing to accept tips on stock market investing to enhance her returns.
Even though Mrs. Saver appears to do it correctly, she still makes a classic investing mistake that holds her back from making as much as she should in a particular investment over the longer term. The worst part is, even after the fact, she has no idea of exactly what she did wrong.
Allow me to explain:
One of the investments Mrs. Saver made a couple of years ago was by the book. Her family was using a service called Netflix and really liked the concept, the service and hence, the company. She took a page out of the old school of investing (Peter Lynch) that says – Find the companies you really like and invest in them. She did just that.
After she owned the company for about a year, to her great pleasure she was up over 100% on the investment. Being a relatively conservative investor, she sold it, booked the profit and moved on.
Normally, this would be a great thing and she would have been considered a smart investor, right. Wrong. She picked a great stock, but she didn’t have a strategy or system of investing.
What Mrs. Saver should have done was the following:
As soon as Netflix was up 100% – sell half and let the rest ride. You never want to cut your winners lose too early, and you never want to hold your losers too long. Most people do the exact opposite of what they should, at exactly the wrong time. Mrs. Saver is a perfect example.
Mrs. Saver did well on the investment, she purchased 500 shares at the time for about $10,000. She made $10,000. If she followed a simple strategy of letting your winners go after taking back your original investment, she would be sitting on a profit today of almost $100,000 or as we say in the investment business, a ten bagger!
Lesson learned: You need to have a disciplined approach and a system. Most people don’t and most of the time they lose.
Invest with vigilance.