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Get Past Your Core Beliefs and Confront the Dissonance in Your Portfolio

At the end of the day, the ultimate arbiter of reality is price.  Price is the only thing that pays. You can throw out opinions, breaking headlines, confidence, sentiment, valuations, economic ratios, or any other indicator of where we are at in the current market cycle.

The market does not care where you or I think it should go and often times react in a completely unpredictable way.That is why you have to be prepared for any eventual outcome if you want to be a successful investor.

Everyone has been wrong in their investing endeavors at some point in time.  I often admit that I am too cautious when stocks are going up and not aggressive enough buying dips when those opportunities are presented. I find myself fighting those same what if scenarios in my head all the time. There is no shame in being wrong; there is only shame in staying wrong despite all evidence to the contrary.

Here are a couple of simple tips to overcome cognitive dissonance in your investment portfolio:

1. Don't fall in love with any investment You don't want to become so enamored with a particular stock or exchange-traded fund that you find yourself watching it fall out of bed or underperform. Try to be as objective as possible when looking at your existing positions to determine if they still warrant being in your portfolio.

2. Stop calling tops. Every week I see a new expert trying to tell us how stocks can't possibly go any higher and to prepare for Armageddon in the markets.  Know why? Fear sells. However, fear rarely makes you any money.

3. Create a watch list.You should have a watch list of positions that you are considering for your portfolio and comparing them to your existing holdings. Refresh these ideas on a regular basis as the markets change to make sure you are capturing new opportunities and setting price points where you will implement them.

I recently purchased the Vanguard Emerging Market ETF (VWO) for my growth-oriented clients because it was a holding on my watch list that I actively monitored and met the price targets I established. 

4. Manage risk with stop losses. In investing there are four possible outcomes: (1) a big gain, (2) a small gain, (3) a small loss and (4) a big loss. The first three outcomes are acceptable. However, you always want to avoid a big loss that can set you back significantly. I always recommend setting a trailing stop loss or other sell discipline to define your risk and delineate a clear exit strategy.

5. Stay balanced. While it may not always be possible to clearly see both sides of the trade based on our core beliefs, you should keep a balanced mindset when constructing your portfolio. Confidence and discipline can be used effectively to implement new investment ideas.

However, an overabundance of greed, fear, or conviction can wreak havoc on your nest egg. Consider building your portfolio with multiple asset classes as another method of diversification and risk management.

While there is no perfect formula for the stock market, there are disciplined steps you can take to improve your outcome. The first undertaking on that journey is to become self-aware of any ideological bias that may have worked against you in the past and fight to overcome it in the future. That way you are better prepared to take advantage of new opportunities when they come your way.

At the time of publication the author had a position in VWO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Citigroup Looks Like a Smart Hedge as Interest Rates Remain Low

David Fabian is a managing partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts and special reports. Visit www.fmdcapital.com to learn more.
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