By Chew Hock Beng
It may sound bizarre but the first step to making a profit in the stock market is to accept making a loss. Not a real loss, but what’s called a paper-loss i.e. mark-to-market valuation showing losses. This means that you must expect any investment you make to go down over the short-medium period, but in the long term it will very likely generate a profit. All this is not just some fancy theory, but based on what is commonly observed and involves investors’ psychology.
You may do a great amount of research work and put in hours to come up with an investment strategy and the investment-based financial planner whom you engaged may offer you the best investment advice. While this is good discipline, the reality is it by no means guaranteed success.
Making sustainable profits from investment depends on endless factors, some predictable and others totally unforeseen. So, how do you ensure a good investment growth over long-term?
When you make an investment, you should be prepared not to expect any positive returns for the short to medium term. In such a case of uncertainty, expectation is what is considered the most likely to happen. Expectation is a belief centered to the future and it might or might not happen. More often than not, investors tend to feel disappointed when they do not expect the unexpected.
So expecting loss before gain will go a long way. Investors have to accept the fact that 99.9% of the time they will be unable to pick the bottom of market. But to ensure the odds are in their favor, investors must obtain good advice and acquire time. According to Newton’s law of gravity, what goes up must come down, what goes down must come up (except for one’s age!).
Expecting loss is an important psychological step to cross a bear market, when things are less rosy and negative market sentiment overrule. Bull markets can sometimes send you the wrong signals and lead you to think that the markets will never disappoint you. And, often investors get into without asking the right questions hoping to make quick profits. Then psychological expectations grow out of proportion and greed gets the better of them.
Investors would end up holding onto investment assets but with increasing and unnecessary risks. And when the markets crash without warning, it may be too late to exit (The Lehman Brothers) without getting burnt. One way is to adopt the “ERP” approach when various investment opportunities are evaluated. As an intelligent and informed investor you should not only be motivated by (P)erformances, but also be aware of taking calculated (R)isks and the cost of maintaining the investment or the (E)xpenses incurred.
Buying into an overly bullish market is clearly not based on taking calculated risks. On the other hand, when the market is more bearish, you could be able to identify the potential value in the capital market. Due to the less optimistic investing environment, you need to adopt a more practical return growth path and accept more realistic returns.
Your main focus is on the recovery and how you can ride on it. What we want is the return and not to be stuck with those funds that is not performing. Hence, the most important strategy is to buy only fundamentally sound diversified investments across asset classes, geographical regions and funds of reputable fund managers with strong investment ratings.
Getting over a negative state of mind through loss expectation is very important in a bear market. You should hold on to fundamentally strong investment assets on a long term basis and be prepared to take in the “paper loss” arising in the short term and mid term. Keep in mind, successful investors are in control of their emotions and are more likely to act on facts as opposed to feelings.
Patience and perseverance are two essential traits during a bearish market. If you are able to handle losses emotionally and come out of it, you would have more flexibility and adaptability to handle future uncertainty better. Even the best investment selection system would lose money if you do not have the right attitude, so develop a positive one. Always have a long term view, this is a sound investment strategy and has been proven to be successful towards building and preserving your core wealth.
So be prepared and expect incurring small loss to gain BIG profit!
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I have the privilege to invite Mr Chew Hock Beng as guest speaker in my next seminar “How to Construct your investment retirement portfolio without losing sleep“. You sign up at the following link:
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Chew Hock Beng is a Director in Financial Alliance. He is a Chartered Financial Consultant (ChFC), Certified Life Underwriter (CLU), Certified Financial Planner (CFP) and holds a Bachelor of Engineering from NTU. Hock Beng entered the Financial Services industry upon graduation from NTU and has since received numerous accolades and achievements in the industry. He believes in adopting a balanced approach to carry out the financial touch together with his client to move away from the path of financial darkness and achieve Financial Enlightenment. He is inspired to keep things simple and ensure the delivery of sound and effective advice from someone who cares.