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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

5 ways to protect profits as the bull market turns 5

Avoiding costly errors is more important than uncovering winners.

  • By Jeff Reeves,
  • MarketWatch
  • – 03/06/2014
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Sunday, March 9, is the five year anniversary of the bear-market lows.

For many investors, this date is etched in our memories — along with the number 676, the closing price of the S&P 500 (.SPX) that day that marked the lowest level for the benchmark since 1996.

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We've come a long way. And on the fifth anniversary of this bull market, it's natural to ask how much more room left we have to run.

But to me, investors focused on the life remaining in this bull market are missing the point. It's much more important to worry about minimizing mistakes than it is to maximize returns while the wind is at your back.

It's admittedly hard to hear that avoiding errors is more important than uncovering winners. After all, we remember Reggie Jackson as "Mr. October" for his clutch post-season performance and not his 2,597 strike outs — one every 3.8 at bats. In the U.S., errors are "teachable moments" in the classroom and entrepreneurs preach the virtues of failing as part of "iterating" in the workplace.

But investing isn't a world of intangibles and intellectual capital.

Investing is a world of monetary capital, brutal and absolute, and you literally cannot afford to be so dispassionate about failure.

So whether or not the bull market runs another six weeks or six years, here are some simple ways to make fewer mistakes — and consequently, make the most out of your investment strategy:

Cut out costs

Shift your focus from returns to costs. Because whether you're paying well-heeled hedge fund managers their "two and twenty" or whether you're paying higher fees on a simple large-cap mutual fund, you could be leaving serious money on the table long-term.

Here's some simple math to illustrate:

  • $100,000 invested at a 5% annual rate of return for 25 years will result in a final nest egg just shy of $340,000
  • $100,000 invested at a 6% return for 25 years will leave you with almost $430,000 — $90,000 more.

That's the power of compound interest. But while many investors focus on chasing bigger returns to squeeze out that extra 1%, high fees often gobble up that outperformance — and then some. Why not simply cut out costs along the way to hang on to more of your returns rather than enrich your broker or fund manager?

Besides, countless studies show expensive active managers rarely deliver their promised outperformance anyway.

Diversify

According to Berkshire Hathaway chief executive and investing icon Warren Buffett, investing is "very, very easy." His advice?

"Buy an index fund, preferably over time, so you end up owning good businesses at a reasonable average price," Buffett told USA Today last year. He adds that, "If you own a cross-section of American businesses, and you don't get excited (and buy) just at the very top, and if you buy in over time, you are going to do well."

Need further proof? Well, consider that the S&P 500 index has actually slightly outperformed Berkshire Hathaway stock over the last five years since the bear market lows.

At least Buffett is self-aware enough to understand he's swimming upstream.

Sure, there's the potential to make big money by getting overweight in a small number of stocks. But that also leaves you open to big bets in bad investments.

Just ask John Paulson about his big gold bet last year.

Control your emotions

The old adage on Wall Street is to "buy low and sell high." But investors frequently to do the opposite, thanks to their emotions.

When a stock like Twitter (TWTR) takes off, it's the envy of Wall Street and giddy investors pile in. They certainly aren't buying low — they are buying high and hoping to sell higher.

That may have worked for folks who bought in November of last year… but Twitter is now down over 25% from its 2013 highs.

Similarly, when a stock like J.C. Penney (JCP) is cratering, investors flee like rats from a sinking ship. But those who panicked and sold Penney below $5 are kicking themselves now that the stock is back around $9.

This is not to say that Twitter won't go higher or J.C. Penney won't ultimately roll back again. I'm simply using these stocks as examples of herd mentality, where investors let their emotions get the better of them.

Do your research, focus on the facts and don't let either the euphoria or despair of Wall Street affect your trading.

Argue with yourself

One of the biggest perils of investing, politics and life in general is the risk of "confirmation bias." Or put more plainly, seeing what we want to see.

At its worst, confirmation bias makes investors delusional — like hyperinflation fear-mongers who insist that the market is being manipulated, and that there's a vast government conspiracy to dupe the investing public.

But even in its less pernicious forms, confirmation bias prevents investors from seeing all sides of an issue.

A good example: My bonehead prediction about Facebook (FB) earnings, which was influenced by my personal experiences with deflationary online ad rates, among other things.

If you're an investor who has had past success and a decent chunk of change in the bank, you want to believe this is because of your own skill and wisdom. And it very well may be.

Still, it's important to understand that every transaction has a counterparty.

A smart investors tries to understand the other side of the trade, and tries to understand the motivations of others… even if they disagree.

Be realistic

I'll admit that every once in a while, when the Powerball creeps up to $300 million or so, I foolishly buy a ticket. But I have no expectations of winning, and I certainly don't see this as a retirement plan.

I'd encourage the same mindset for all those get-rich-quick Wall Street schemes too, including unsolicited emails promising you 1,000% returns or friends that try to impress upon you the big potential in microcap penny stocks.

The bottom line is that saving for a successful retirement isn't easy. It involves sacrifice through savings and patience to see your nest egg grow. Be realistic about the challenge in front of you, and be honest about the fact that there are no quick fixes.

Similarly, don't fall into the trap of thinking that low-return investments are categorically "bad."

Consider that a recent Charles Schwab report showed that only two years since 1976 have seen declines of more than 1% in bonds — a 2.9% loss for the Barclays U.S. Aggregate Bond Index (AGG/IV) in 1994, and a 2.0% decline in 2013. As a capital preservation tool, bonds are clearly a powerful place to put your money.

Should you abandon bonds altogether because this bull market delivered 30% returns last year? No way.

Nor should you cut back on your savings rate because you believe a 20% annual return is possible thanks to a bull market tailwind and some slick stock picker sending you "exclusive" tips.

The bottom line is that investing is hard…but it's not impossible.

Be realistic about your finances, your rate of return, and your retirement goals and you can get there.

Try to take shortcuts and you'll wind up doing much more harm than good, regardless of whether this bull market sticks around.

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