Bad Idea: Trying to Win Big
Go big or go home shouldn’t apply to investing. Trying to make a big killing in the market is a bad idea for your long-term wellbeing. Yet I keep running into people who don’t understand that. They will be sorry eventually.
The psychology behind this win-big notion is widespread in our society. We always want to be the best, whether it’s hitting the longest drive, driving the nicest car or owning the biggest TV. This notion of “go big or go home’” was draped over the American culture decades ago. No one wants to be left behind, and if you’re going to do something, you might as well do it BIG!
This type of thinking can get people in trouble when it comes to their investments. Investors often talk about the large gains in a stock where a few days created nice returns on their statements. But this approach ignores the massive amounts of risk they take to get those returns. While our friends or co-workers enjoy sharing tales of their daring exploits, keep in mind that few people ever seem to mention the losses.
While getting lucky at a casino can be a good thing, a fortunate break can harm your investment outcomes. Say, the very first time you play golf, you hit a hole-in-one. You are ecstatic. You likely have no clue, however, what you did to perform that feat, or know how to repeat it. But since you got lucky that once, you turn overconfident.
The same can happen with trading. It just takes a few lucky trades to boost an ego and dismiss the valuable lessons learned about proper risk management. This ego boost can take you down a path of seeking out more risk and looking to go big or go home with your next investment or trade.
We should view investing as a journey and not just a snapshot. This idea fits well into the notion that to invest based on a go-big-or-go-home approach is more likely to blow up an investment account rather than expand it. Millions, if not billions, of dollars are lost on trades that depend on luck.
The glorious vision of conquering the stock market blinds investors. This is a trap. The true investing success stories come from those with dependable, diligent processes. Those investors are more concerned with minimizing their risk than having a good story about a gamble that paid off.
Investing and retirement planning is a journey, and one that you should not take lightly. While having stories to tell around the water cooler is fun, it’s not wise to wager on that go-big-or-go-home trade – when the odds are strong that this reckless boldness can ruin your future.
Risk management is one of the most important concepts we must practice, and unfortunately can be quickly forgotten when our egos get in the way.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe_Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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