If you bought into the S&P 500 index in the mid to late
1990’s, you were probably underwater—10 years later. The real possibility of bear markets, both secular and cyclical, means that investors should never simply buy and hold. Instead, you need to buy more when the market is fearful and sell more when the market is euphoric.
Average In
Throwing good money after bad is a more direct way of restating this rule. Buying more shares of Lehman Brothers, AIG, or Nortel Networks on their way down, was no sure fire route to success. You should never chase down stocks that have low prospects of recovery.
Ignore Price Fluctuations
If one of your holdings jumps 50% or more, and then falls 50% leaving you below your cost, wouldn’t it have been wiser to protect the original profit? Ignoring short-term fluctuations, in reality, exposes you to missed opportunities for profit and greater risk of loss.
