It’s hopelessly optimistic to believe that an investor who is shell shocked following a big loss can somehow return to investing with the confidence necessary to consistently apply even the most proven investing system. If in your heart of hearts you believe the system you are now using might fail, you’ll abandon that system at the slightest sign of trouble.
One of the reasons that bear markets are so devastating to investors is that they usually don’t end in a way that restores that shredded self-confidence. Volatility hasn’t vanished — the market still rallies and pulls back with enough uncertainty so that even if the trend is now upward, there are plenty of sickening drops to scare you into selling again.
Every disappointment casts doubt on your ability to profit. And every time some other investor makes more money than you do in a rally, you kick yourself again.
The result of this lost self-confidence can be excessive trading as you skip from one hot stock to another. A continued pattern of buying high and selling low as you dive into new trends at their peaks and sell trends that haven’t delivered exactly the returns you wished for on the schedule you had in mind.
So how do you combat this loss of confidence and rebuild the confidence you need to succeed?
Not by piling into the riskiest investments you can find, no matter their potential return. The cost of being wrong — again — is simply too high.
Instead, you apply an extra dollop of conservatism. You take on no more risk than you are comfortable with: the goal is not to put yourself in a position to panic. You set your goals deliberately low instead of a swing-for-the-fences target. And you concentrate on eliminating as much company and market risk as possible.
Adapted from The Street
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