You Lose More Money When Stocks Go Down

You can lose more money when stocks go down than you can make when they go up. In It's Never Too Late to Get Rich: The Nine Secrets to Building a Nest Egg at Any Age, Jim Jorgenson and Rich Jorgenson write about the downside of a buy-and-hold approach using an example.

A Comparison of Buy-and-Hold and Trend Investing
Jim and Rich write the following:

"An investor who invested a dollar sixty years ago and stayed in the market at all times could have a portfolio worth about $17,000 today. But if he was out of the market for just the 20 best months in the sixty years, months when the stock market was doing very well, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth $1,700,000. Another Wall Street saying to remember is:

Investors can lose more money when stocks go down than they can mak when they go up.

Because the average investor can lose more money when stocks go down than they can make when they go up, a buy-and-hold strategy may not be the best way to invest during proloned bear markets, which have occured over the past few years. In fact, a period of falling stock and mutual fund prices can reduce a buy-and-hold investor's annual returns over five years to less than those of a taxable money-market fund, and in many cases to an annual loss. As a result, individually managed accounts have become one of the fastest growing ways to invest. "

Key Take Aways
I've seen this first hand. When I joined Microsoft, a mentor told me there was a key difference between the well-off and the not-so-well-off. The well-off held on to their options when they invested. The not-so-well-off, cashed their options and lived beyond their means. I took this to mean that, as a rule, you should hold on forever. I later learned, that holding on forever is not the right strategy. You can in fact, lose more when the stocks go down than you make when they go up.

What You Become By Reaching Your Goals

Goal setting is a powerful tool for personal development. In Your Road Map for Success: You Can Get There from Here, John C. Maxwell writes:

"Retail department store founder J.C. Penny declared, "Give me a stock clerk with a goal and I will give you a man who will make history. Give me a man without a goal and I will give you a stock clerk." Penny recognized the power and importance of goals. While you work on them, they work on you. And what you get by reaching your goals is not nearly as important as what you become by reaching them. "

My Related Posts

• How To Figure Out What You Really Want
• Fear of Becoming Who You Truly Are
• Skills for the Road Ahead

How To Figure Out What You Really Want

What if you spend your years climbing the corporate ladder, only to find that your ladder was up against the wrong wall? What if money can't buy what you're really looking for? What if there's a simpler or more effective way to get what you want? In Work from the Inside Out: Seven Steps to Loving What You Do, Nancy O'Hara writes about an approach to help you figure out what you really want.

Work Goals, Thing Goals, Feeling Goals and Thinking Goals
How do you figure out what you really want? What do you really want at work? What tangible things do you want? What relationships do you want? What feelings do you want more of (or less of)? What states of mind (such as peace of mind) do you want more of?

Finding the Goal Behind the Goal
Identifying what you really want can be tricky. The pursuit of a tangible goal, such as a Ferarri, might be masking a feeling goal (more freedom, feeling of competence or feeling of success.) Pursuiting that Ferarri might cause you a lot of stress in your life, when maybe all you needed to do was go fishing. Maybe there's another strategy to drive Ferraris (e.g. maybe a lot attendant at a rich club.)

Steps For Figuring Out What You Really Want
O'Hara writes the following steps:

1. Write a random and comprehensive list of all the tangible things you would like to have that you don't now have (in no particular order.)
2. Now prioritize the list by placing numbers before each item, with the number 1 being assigned to the most desired thing.
3. Then for the top ten items on the list assign a number from 1 to 5 that indicates the intensity of your desire, with 1 being low and 5 being high.
4. For each of the ten items write a paragraph or two about how having them would change or not change your life and how not having them now affects your life.
5. Repeat exercises 1 to 4 with a list of intangible things you would like to have in your life. (This could include relationships, feelings, states of mind.)
6. Repeat exercises 1 to 4 with work-related desires (perhaps your ideal job, a new boss, a different schedule.)
7. On a separate piece of paper write down the most-desired thing from each list and put it aside for the moment. Then collect all the pages you've written on to complete the exercise in this section and make a ritual of burning or otherwise destroying them. Choose a time when you can be alone. Read over (preferably out loud) what you've written and sit quietly, absorbing the extent of your own desires and the dissatisfaction they've created. Then shred the papers into tiny pieces and/or safely burn them. As you watch them disappear, imagine your desire for them also going up in smoke. Be willing -- even just for the time it takes to do this exercise -- to let them go.
8. Afterward sit quietly again and absorb the impact of this ritual. Write about the feelings it evoked and what effect, if any, it had on your wish list.
9. Now look at the three desires you wrote down and set aside. Is your level of desire for these things the same as it was when you first wrote about them? Concentrate on the work-related desire and write about what you could do to attain it. And if it still feels that your life will be more complete with it than without it, then make a plan that will move you toward getting it. And decide, since it is so important to have this thing, that everything along the way you must do to get it will be as important, as valued and as pleasing as the thing itself. Each act, each chore is a part of the thing itself because without them you cannot have it. If you see each of those things in this way, then you will see that in the doing of these things you already have them. Absorb yourself in these details, enjoy the process of getting to it, and maybe when you get there it will feel as though you've had it all along

Key Take Aways
I had several take aways from this particular approach:

• Frame out work goals, relationship goals, feeling goals, and thinking goals. I think a lot of goal setting exercises that people are taught tend to be pretty limited. I like the fact that O'Hara frames out the goals into meaningful buckets. I think this is the key to figuring out the real drivers behind some goals.
• Unmasking your goals is a key step for clarity. The goal behind the goal is what's important. I particularly like the unmasking process O'Hara lays out.
• Make the process as meaningful as the outcome. The pursuit needs to be as meaningful as the accomplishment. My favorite line from her steps is "...And decide, since it is so important to have this thing, that everything along the way you must do to get it will be as important, as valued and as pleasing as the thing itself...". For me, the most important message in this is that the process of achieving the goal is as important as the goal itself. It makes the day to day meaningful. If you know you're moving towards what you want, which may require sacrifice, but you are aware of what you are trading, the path becomes more rewarding. See Process Over Product Orientation.
• Results are instant. As soon as you know your are on your path, every step on your path is the right one. Martin Luther talked and walked his dream - his pursuit was as meaningful as his accomplishments. In one night, Ebenezer Scrooge got to see his past, present and future. He didn't like his future. He started living the life he wanted to lead the next day.
• Purpose and passion get you back up on your your horse. Life happens. We got knocked off our horses. The trick is getting back on. Having clarity in what you want and passion in what you do, helps you get back on your horse. If you're not confident in your path, it's easier to get knocked off your horse and even tougher to get back on.
• Check that your ladder is up against the right wall. Having clarity on what you want, helps you choose more effective strategies. if you know what you really want, you can choose more effective strategies.
• Mitigrate the risks of having a life of regrets. Scrooge didn't like his outcome. He immediatley chose a more caring approach with the people in his life and changed his destiny.
• Maybe you've had it all along. When I read this line "...Absorb yourself in these details, enjoy the process of getting to it, and maybe when you get there it will feel as though you've had it all along ..." I can't help but to think of Dorothy when she got back home, and realized there's no place like home.

Additional Resources

• How To Discover Your Life Purpose in About 20 Minutes
• The Power of Clarity
• Deciding What To Do With Your Life

My Related Posts

• Fear of Becoming Who You Truly Are
• Process Orientation Over Product Orientation
• How To Overcome Resistance
• How To Paint a Future Picture