“Winning isn’t everything — but wanting to win is.” ― Vince Lombardi
Winning—it’s part of our DNA. We celebrate winning teams, winning people, and winning businesses. But while an unrelenting focus on winning has created lots of celebratory moments for humans everywhere, it can potentially give you a severe headache if you let your drive to win control how you manage your investment portfolio.
In long-running bull-market environments, like the one we are currently experiencing, some investors begin focusing on maximizing their returns. They start to measure their success against every investment story they hear. For example, cocktail-party talk about an investment windfall can trigger dissatisfaction for some investors who begin to believe that merely making a solid, steady investment return is not enough reward.
While there is certainly nothing wrong with taking a serious interest in your investments and keeping current on new ideas and strategies, you may be going too far if you become so focused on chasing returns that you make investment-strategy changes based solely on your desire to “win.”
In addition to the unnecessary stress this causes, you can damage the value of your investment portfolio. A well-diversified investment strategy will never make you a “winner” if you only measure winning by short-term gains—or cocktail-party bragging rights. That’s because a diversified investment strategy is designed to provide both return and risk control, which are invariably absent in any story qualifying for bragging rights.
This return-chasing behavior allows emotions to control your investment strategy, which can be significantly harmful to your financial future. Why? Because simply avoiding big losses can be much more important to your long-term investment strategy than capturing maximum market gains during any short-term period.
For example:
- 1. If you start with a $100 and you suffer a 20% loss, what level of subsequent return brings you back to a breakeven point?
- 2. If you suffer a 60% loss, what subsequent return do you need just to break even?
- 3. If disaster strikes and you lose 80% of your $100 investment, how much return do you need to fully recover your $100?
