Retirement planning would be much easier if we didn't make one simple mistake.
There are already a ton of difficult variables that go into retirement planning -- like how much to save, where to invest that money, and when to take Social Security. But we make the process much more difficult by making one huge mistake. Let me explain using a story from my own life.
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A quick plunge in CAPSHere at The Motley Fool, we have a real-time game called CAPS. Basically, this allows anyone to make a call on a stock -- whether it will out- or under-perform the S&P 500 -- and then be held accountable for it. You get a percentile ranking from zero to 100 based on a combination of your accuracy and the total number of points (outperformance) you accumulate.
For a very long time, I was in the 95th percentile of all CAPS players. Then -- rather suddenly -- my score plummeted. Currently, I'm all the way down in the 67th percentile. That's because while I have an accuracy of over 60%, I have very few "points" to show for it.
When I went to investigate why I went from almost 700 points to nil, I was shocked by what I found. Quite simply, I had sold many of my winners early, and let my losers run -- hoping that they would one day "come back up."
Take a look at some of the picks I made and then closed because I was happy with gaining just a couple of points. Keep in mind that none of these decisions were based on business fundamentals -- just my desire to "lock in gains."
Source: YCharts, author's calculations of CAPS portfolio.
This is beyond astounding. While the average pick outperformed by market by a respectable 45 percentage points while I "held" them, I missed out on huge upsides. Had I not "sold" any of these positions in my CAPS portfolio, I have little doubt that I'd still be in the 95th percentile.
Of course, I cherry-picked these players. There are stocks that I closed that ended up being good moves. But the degree by which they were "good" picks pales in comparison. While I saved 10 or 20 points here or there by closing certain positions, they are nowhere near the upside magnitude that I missed out on.
The lesson for your retirement planningNassim Taleb is the author of the best-selling book, The Black Swan. After reading it, I came away with many conclusions, one of them being: position yourself for situations where downside is limited, but upside is unlimited.
For anyone putting money into stocks, this is exactly what the stock market is: an opportunity for limited downside and unlimited upside. Of course, no one wants to lose 100% of their money, but your losses stop there -- as long as you're not using leverage. But your upside is unlimited -- and it is this fact that so many people would benefit from examining.
Our own Rick Munarriz bemoaned the fact that his desire to "lock in gains" -- among other things -- cost him over $500,000 on shares of Netflix. How many others out there have sold their winning ticket to an early retirement by bailing out of a stock after it had appreciated?
Our own David Gardner has held shares of Amazon.com since he bought them in 1997 at a split-adjusted $3.19 per share. Since then, shares have appreciated 13,530%. Even if his initial investment was just $10,000, that money would be worth almost $1.4 million today.
Sadly, David is an anomaly. As The Wall Street Journal's Jason Zweig pointed out last year, the average investor not only does much worse than someone like David Gardner, but much worse than the buy-and-forget stock holder as well.
Zweig cites information from Dalbar, a financial research company, which found that while the S&P 500 returned 11.1% annually between 1984-2014, the average investor only earned a 3.7% return.
How big of a difference does that make? Let's assume that you invested $1,000 every year for 30 years. Here's what the difference looks like.
The difference is monstrous -- with a buy-and-forget investor having a balance four times the size of the average investor. How does this happen?
Quite simply, we tend to buy high and sell low, despite our best intentions. While we think it is easy to accomplish in theory, we forget the mental anguish and turmoil that comes with buying when there's panic in the streets, and selling when everyone is getting in on the game.
That only compounds when it comes to letting our biggest winners run. Who wants to risk losing huge gains by letting a large holding continue to fluctuate? For many of us, that's too much pressure. It's too bad we couldn't just focus on something else -- and let our winners be. If we could, the retirement planning process would be much easier.
The article This Investing Mistake Can Ruin Your Retirement Planning originally appeared on Fool.com.
Brian Stoffel owns shares of Amazon.com, Apple, Facebook, and Starbucks. The Motley Fool recommends Amazon.com, Apple, Facebook, Netflix, Priceline Group, Starbucks, and Under Armour. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Netflix, Priceline Group, Starbucks, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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