There are other criteria such as year-to-year performance, however a professional stock investor is only as good as the last performance measurement.
This places a tremendous amount of pressure on professional investors to continually do better than a major stock index such as the S&P 500.
Indeed, many personal stock investors believe they have to “beat the market” with their investments.
While many people find that having a goal of beating a stock index spurs their competitive nature and challenges them to do better.
Such pressure can be helpful, but it can also encourage more risk taking than appropriate.
This is a common problem with mutual fund managers who strive to beat not only the market, but also their own investing performance history.
When the market is not forthcoming with easy profits, mutual fund managers may resort to more risky strategies to boost returns.
Such risks can, and often do, turn against the manager and result in more losses.
Individual investors want to make money, but should always keep their investment goals and risk profile in mind when faced with a challenging market.
We face the same temptation as the professional money managers to make riskier investments hoping for a big score to improve performance (or recover our losses).
Raising the risks of your investments may pay off, but most often you will lose more and lose it more quickly.
One of my rules for investing success says: the way to make money in the stock market is to avoid losing it.
This means staying within your comfort range on investments and avoiding the big losses.
It is better to acknowledge a bad investment and cut your losses than holding on hoping it will recover.
It also means don’t step outside your comfort zone with risky investments.
Select an exit price and stick with it. The exit price is the most you are willing to lose.
When the stock hits this price, sell and don’t look back. The worse decision is to stubbornly hold on to a stock as it continues to drop in hopes it will recover.
The stock may indeed recover or it may not, but you should not worry about that. Your plan is to keep losses small.
If you avoid the trap of taking on more risk to boost performance, you have a better chance of long-term success.
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