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  • Rossi Stone posted an update 1 year, 3 months ago

    Liz Ann Sonders’ Top 3 Investment Principles

    Liz Ann Sonders is the Chief Investment Strategist for Charles Schwab Check out the top three investment principles we can learn from her! She handles strategy and research for their retail and institutional clients.

    Over the years, Sonders has shared plenty of investment insights in her interviews with outlets such as the Wall Street Journal and Barron’s.

    Here are the top three investment principles we can learn from her:

    Top 3 Investment Principles To Learn From Liz Ann Sonders:

    Lesson 1: Always Have A Plan:

    Sonders is a big proponent of having an investment plan for any market scenario.

    She believes you must have a clearly defined strategy before placing a trade. Otherwise you’ll make impulsive decisions and lose.

    Now unfortunately, impulsive decisions are something investors fight against everyday. And the reason why they’re so frequent and difficult is because of our own evolutionary biology.

    If we look at our history, a majority of our human existence was spent as hunters/gathers in a tribal lifestyle. Our brains developed within this environment over millions of years and are now hard-wired for it.

    Think back to our ancestors who encountered lions, hyenas, and other predators while roaming the Sub-Saharan plains…

    To counteract these threats, they developed a “fight-or-flight” response.

    Their brains’ amygdala would flood their bodies with feelings of fear and aggression along with hormones like adrenaline and cortisol when faced with danger. This prepared them to either fight or run.

    This fight-or-flight response is still present within all of us today. And while it’s useful in some situations — like when avoiding a car crash or removing your hand from a burning stove — it’s detrimental in others, like in investing.

    To our brains, large losses in a trading account feel the same as a lion attack in the wilderness. The same psychological and physiological changes take place. But in this case, they’re not helpful. We just freeze, panic, and eventually lose.

    The key to control this biological response is by implementing an investment plan.

    A plan allows us to transfer decision-making from our impulsive fight-or-flight amygdala to our relaxed prefrontal cortex.

    A good plan will have specific action steps to take depending on the market situation with guidelines in place for when our emotions inevitably run wild. It’ll ensure that in the heat of the moment, our rational brain will triumph over our emotional brain.

    For example, as part of our team’s investment plan at Macro Ops, we only place buy and sell orders at the end of the day after the market has closed.

    This forces us to make decisions on closing prices instead of intraday swings so that we aren’t emotionally triggered by any market volatility.

    This simple rule has saved us countless dollars. It’s easy and effective. And it’s just one of the many benefits of having an investment plan and following it.

    Lesson 2: Understand Market Sentiment:

    Liz Ann Sonders frequently stresses the importance of understanding market sentiment. Here she is in an interview with The Motley Fool explaining the idea:

    “I think the reality is that especially at extremes, at major turning points, you really could point to sentiment more than anything else.”

    Sentiment refers to how investors are currently viewing the market.

    Are they overly bullish? Overly bearish? Are they valuing particular metrics over others?

    The truth is that sentiment is subjective and doesn’t always make sense. It’s just the sum of how the market (and the investors that make up that market) feel. It’s neither “right” nor “wrong”.

    Tulips in the 1800s, internet stocks in the 1990s, cryptocurrencies today — in retrospect, it’s easy to say all these were bubbles created by idiocy.

    And that may be true, but regardless, that was the prevailing market sentiment at the time. And to be a successful investor, you must be able to play that sentiment without falling victim to it.

    Lesson 3: Practice Patience:

    Liz Ann Sonders believes that investors need to have patience when investing.

    We agree and have found patience to be one of the most important characteristics of all the superinvestors we’ve studied.

    Now this sounds simple enough, but in practice, it’s much harder than it looks.

    There was a crazy study done a few years ago that revealed that most people would rather physically harm themselves than sit alone in a room and do nothing.Investors are the same way.

    We “harm” ourselves by being overactive in the markets. We’re constantly making new, bad investments because we’re obsessed with the next “shiny thing”.

    Now fortunately, there are ways to fight this urge to hurt ourselves.

    First, investors should set the highest-possible bar for new portfolio entrants. This means that you’re not buying a new stock unless it’s miles better than your least favorite position in your portfolio how old is liz ann sonders