Pruning the Dead Branches

It isn't hard to show what happens when you hang on to losers, or even the inferior "winners."

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Compared to market returns, an investor underperforming the market by 2% (or achieving an 8% return) falls:

• 17% behind a market performer after 10 years,
• 31% behind over 20 years, and
• 42% behind over 30 years.

An investor underperforming by 6% loses:

• 43% to the market-performing investor over 10 years,
• 67% over 20 years, and,
• 81% over 30 years.

That's quite a price to pay for underperformance.

Now, if your investments are producing negative returns, the results can be quite ugly indeed.

There's a lesson in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!

Opportunity Lost

The mathematical power of compounding makes a small increase in investing return, or i, very compelling. To increase the chances of achieving a higher i, buy cheap. Buy expensive, and you'll be lucky to match market returns.

Investors should know how beating the market with even slightly higher rates of return is a shorter path to wealth.

This is especially true if the investments are left on the table to perform, and perform consistently, over time.

What about investments achieving less than market average return?

What happens when you cling to these investments?

Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?

From an investment perspective, the answer is yes.