One of the concerns I have about my investing future is my own emotions. One day I may become bold or fearful and make some rash decisions. The resulting trades would probably work out badly.
I consider my online trading account to be one of the things that increases my risk of doing something impulsive. Some people say that the solution is to work through a financial advisor who performs the trades for you. I have a much cheaper solution: I avoid logging in to my trading account unless it is necessary.
Many people choose to read stock quotes and other investing news through their online accounts. When you do this, making trades is always just a few clicks away. I do my day-to-day financial news gathering anywhere but through my trading account. This small extra barrier of trying to remember my password and figuring out how to make a trade gives me a little more protection against impulsiveness.
Usually, the people I mention this to think I’m a little crazy. Is anyone else concerned about their emotions getting out of control resulting in dumb trading? What methods do you use to stop yourself?
I know many people set up a small portion of their portfolios in a separate account (usually 5-10%) and call that their "mad money" account. They will then trade often or take "flyers" or what have you. Often it is an expensive lesson.
ReplyDeleteThe problem is that if they have a run of good luck they can fool themselves into thinking they have skill and start tinkering with their other accounts.
One of the best solutions I've heard is Buffett's punch card - where every transaction you ever make in your life costs you a punch in the card which only has 20 spots. A purchase or a sale is a punch. If people had a lifetime limit on the number of transactions they can make it would certainly make them more inclined to take a lot more time to make up their minds/do their research.
But in the end, recognizing the emotion effect is important. I know an advisor who had a client who went on a 5 year trip (or something like that) and when he came back he had to go through all his mail, including his account statements. The client indicated that he opened them up in order and based on the volatility he got angry then happy in the course of going through all these statements as when the account was going down for a few statements in a row he thought to himself why didn't my advisor sell? Flipped through a few more months and thought, I'm glad he didn't sell, and back and forth, and back and forth. At the end of the five years the account was up substantially, almost double what it was when the client had left. Investor said it was the best lesson on investing he ever got (and now manages his own investments too since it requires such little maintenance).
Michael: It is very tempting to engage in a new trade when you are online.
ReplyDeleteOne of key to define your strategy in advance before you log on. Ben Graham in his famous book "intelligent Investor" advises to make a contract to yourself,that is, "I hereby declare that I will hold each of these investments continually through at least the following date (minimum of 10 years)..."
I have found another way to avoid myself in pitfalls of emotional trading by locking myself into covered call positions. It does not only increase my returns but also provides me decent protection in downside. Moveover, it helps me to stop taking emotional trading decisions while I am online as it takes two steps to reverse any covered call position.
Michael: I know you believe in investing 100% in stocks because you aren't afraid of volatility and don't need bonds to smooth the rise. Pehaps the same discipline could apply to having an online account?
ReplyDeleteLarry:
ReplyDeleteI guess it comes down to how you manage to maintain discipline and rationality. I'm not able to eliminate emotional reactions to my investing results, but I try not to let them affect my decision making. When I'm thinking about making a change, I usually sleep on it before making a final decision. Having a window open on my computer constantly offering me a chance to trade undermines my efforts to slow down and think things through.
Rick: A quick scan of their prospectus seems to show that they achieve their leverage and bear positions using derivatives. So, it would seem that the new short-selling rules would not affect them, but I can't say that I'm certain of this.
ReplyDeleteThe comment above is a response to Rick's question:
DeleteWill the horizon beta pro funds get caught up in the short selling ban?
US and Canada
Rick: This confirms that HBP isn't affected by the new short-selling bans. However, I'm going to go out on a limb and predict that the average investor in their bear ETFs will lose money. To invest in one of these you have to believe that you're either a lot smarter or a lot luckier than everyone else.
ReplyDeleteThe comment above is in response to Rick's comment:
DeleteHorizons BetaPro ETFs Not Affected by Short Selling Prohibition
08:00 EST Monday, Sep 22, 2008
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TORONTO, Sept. 22 /CNW/ - Jovian Capital Corporation (Jovian) (JOV: TSX) and its subsidiary BetaPro Management Inc. (BetaPro), the manager and trustee of the Horizons BetaPro ETFs (each a "HBP ETF"), is pleased to confirm that the temporary order issued by the Ontario Securities Commission on Friday, September 19, 2008, prohibiting the short selling of securities of certain financial institutions does not affect the HBP ETFs, which will all continue to be offered on theToronto Stock Exchange.
About the Horizons BetaPro ETFs
The HBP ETFs are a family of 28 innovative exchange traded funds established under the laws of Ontario. Each HBP ETF is designed to provide daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to a multiple or the inverse (opposite) multiple of the daily performance of a specified underlying index.
About BetaPro Management Inc. (www.HBPETFs.com)
The HBP ETFs are managed by BetaPro, Canada's sole provider of investment tools allowing investors to profit when the market is rising or falling, or to reduce their risk by hedging their existing market exposure. BetaPro currently manages the largest number of Canadian exchange traded funds, with approximately$1.5 billion in client assets amongst the 28 HBP ETFs.
About Jovian Capital Corporation (www.joviancapital.com)
Jovian acquires, creates and grows financial services companies specializing in wealth and asset management. The Jovian group of companies (MGI Securities Inc., MGI Securities (USA) Inc., Rice Financial Group Inc., BetaPro, Horizons Funds Inc., JovFunds Management Inc., JovFunds Inc., JovInvestment Management Inc.,Leon Frazer & Associates Inc., T.E. Wealth and Felcom Data Services Inc.) manages $15.0 billion of client assets ($6.0 billion in assets under management and $9.0 billion in assets under administration). Additional information about Jovian is available at www.joviancapital.com and www.sedar.com.
For further information: Don Sangster, Investor Relations, Jovian Capital Corporation, (416) 933-5744; or Howard Atkinson, President, BetaPro Management Inc., (416) 777-5167
I like the "covered call". Gordon Pape described it in his various books. He explained then that it only works well for widely traded but somewhat volatile stocks. While I invest only inside my RRSP, it is "covered call" enabled. The only futures transaction allowed inside an RRSP. Because of the current market volatility, I have been using the big banks to protect the downside and lock in profits. Since my ETF's are already heavily weighted in Banks (XIU), If I want to "take a flyer", I buy, say, TD or BMO and write a covered call that will force me to a: sell at a profit, or b: let me wait for the stock to come back up while holding someone else's cash (paid to wait). I'm betting Canadian banks aren't as vulnerable. I could be wrong, but that's what investing is all about.
ReplyDeleteAnonymous: With the covered call, you are trading some of your return to reduce volatility. This isn't my choice because I'm willing to accept some volatility to go after the higher returns. Your covered call strategy will help improve returns most of the time, but will cut off your winners during good times. As long as you understand this and have decided that this is the best way to achieve your goals, then go for it.
ReplyDelete