Lose Less

Emotions drive most discussions about money and finances – a fact that is maddening if you are the sort of person who likes to rely on numbers and analysis. One way to defend against the push-pull between fear and greed is to develop a strategy that you can consistently implement—I boil down my strategy to the following two words: lose less.

You have to use a strategy that fits your personality or else it just won’t work over the long term. I learned early on that I am not a great loser—it’s not that I blame anyone else, but I just don’t like the feeling. In fact, in the emotion-o-meter of life, the needle flies to the danger zone when I lose, while winning barely nudges it past the mid-point. Knowing this fact helped me to determine that as an investor, I would be better off limiting losses on the downside, rather than attempting to beat the index on the upside. I am also a fan of statistics and since it was rather difficult to outperform the index in the abstract, I figured that it might be worth trying to do so when everyone else is in high panic mode.

There is only one problem with my system: it runs counter to the normal cycle of fear and greed. I discovered this first-hand from 1999-2003. In 1999 and 2003, when stocks were soaring, I would remind investors that it’s not prudent to try to assume the risk necessary to beat the index, while in the three-year bear market when we were actually beating the index (often by double -digits), people would say, “I know that the S&P 500 is down 25% and my portfolio is only down 4%, but we are still down!” (Cue the sad music!)

Only in retrospect can I truly appreciate that losing less may not be a sexy strategy in the moment, but over the long term, it provides many more restful nights and results that can usually help people reach their goals with less volatility. That fact was driven home when I read some amazing statistics this week in the Wall Street Journal. (Stocks Tarnished By 'Lost Decade' By E.S. Browning March 26, 2008) “The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.”

Of course if you were a diversified investor with a mix of stocks, bonds, cash and commodities, you probably did far better than these numbers, but during the big up years like 1999 and 2003, you had to accept lower returns. If you are like me, you may find that losing less may not be especially sexy, but it sure can be rewarding.