Fifteen favourite fallacies

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11. "I'll never go broke taking a profit"

Oh no? Suppose you invest £50,000 for 20 years, running losses and taking profits in such a way that the value of your portfolio rises at no more than the rate of inflation. Obviously, by the time you retire, you will have the equivalent of what you started with in today's money. Now, how long do you think it will take you to get through that? Three years? Five? Meanwhile, you could still have 15 or more years ahead of you to pay for.

Congratulations! You will have proved that it is indeed possible to go broke taking a profit.

This well-worn proverb is one of the most dangerous fallacies of all in investment. It encourages you to take profits far too early. It also gives you a perfect excuse to indulge in the sort of false “mental accounting” that includes profits but excludes cost and losses from the final reckoning.

Of course, it is true in a trivial sense that you do not go broke as a result of any single transaction in which you take a real profit after allowing for costs. But so what? All that matters in the long run is the total return on your portfolio in real terms, i.e. after inflation. If you have not stored up enough to provide a decent income in retirement, you will go broke before you know it.

1. "Investing is just gambling anyway, so why not take a few chances?" 2. "You've got to speculate to accumulate" 3. "Growth always wins in the end/Value always wins in the end" 4. "Blue chips are best/Smaller companies are best" 5. "Penny shares are the best value for money" 6. "It's such a great company, I can't go wrong" 7. "But just look at the dividends" 8. "I've got to be in technology/biotechnology/telecoms etc" 9. "I missed that one, I'll catch the next one" 10. "Paper losses aren't real" 11. "I'll never go broke taking a profit" 12. "It can't possibly go any lower" 13. "It can't possibly go any higher" 14. I can't sell because of the tax bill 15. "This time it's different" 16. Conclusion

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