High-net worth investors didn't make their money by being irrational. Yet when it comes time to invest their money, they are often made to second-guess their instincts and research by an industry designed to convince them to buy and hold. The most fundamental investing basic says to buy low and sell high, but many investors are made to believe that strategic selling is inherently irrational and misguided.
Wielding Financial Information Like a Shotgun
Financial professionals have the industry background and education, they speak the language and have access to research-based literature and hundreds of charts. Some often use these tools to overwhelm investors with misinformed clutter, which they present as "evidence" that proves it's best to hold during market declines, no matter how steep the drop.
Like a blast of shotgun pellets as opposed to a single bullet fired by a rifle, this barrage of confusing information requires far less accuracy.
This is a fallacy called shotgun argumentation. There is so much information it becomes very difficult if not impossible to refute because investors don’t even know where to begin if they picked out a key piece of missing information in the first place.
The information is too overwhelming for investors to analyze on a point-by-point basis. When confronted with this clutter, investors often resign themselves to assuming their concerns are misguided, they’re irrational, their research is inaccurate, and that it's probably best to follow counsel, hold on and wait it out.
Legitimate Concerns Are Not Irrational
An investor is never irrational to worry about large, exponential losses, like the kind that can and do happen during major crashes. When they raise these concerns during declines, however, they are often told that it would be foolish to try to prevent further losses by selling because:
- The market will inevitably rebound no matter their age.
- If they sell, they could sell at the bottom and lock in their losses.
- They might miss the rally that comes with recovery.
There is simply no evidence when arguments are critically examined to back any of these statements, but when investors are overwhelmed with an intentionally cluttered avalanche of information, they second-guess themselves, assume that they are acting irrationally and "play it safe" by holding and waiting for the inevitable recovery.
It is certainly possible to panic and sell too soon. It is also possible, however, to identify sell signals, exit a crashing market, try to avoid the bottom and miss the most devastating part of a crash.
The decision to sell or hold should be based on research and the identification of discernible patterns, like those that can be revealed by moving averages & thresholds below the market peaks.
It is not possible to determine the top or the bottom of the market. Investing in the market involves risk, including fluctuating prices and the uncertainty of return. There is no guarantee that the investment strategy discussed will be successful.
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