Investment Management:
The Emotions of Investing - Part 2 - "The Fearful Investor"
by: Roy Bodinus for the Debt Consolidation Loan
Directory
Investing is serious business. An investor is wise to be concerned about
losses in his portfolio. How you think about and manage this risk will play a
significant role in your financial success.
One trap I’ve seen investors fall into is what I call The Hibernation Trap. This
occurs when an individual does not fully understand how much risk he is taking
with his portfolio and as a result feels compelled to bail-out of the market
when performance gets choppy. Consider the following example of a seasoned
professional business man that allows his emotions to encourage knee-jerk
reactions.
Like most investors, Steve has no problem watching the value of his investment
account rise when the going is good. When the inevitable does happen, however,
and the stock market takes a breather, Steve pulls his money out of equity funds
and moves to a conservative posture holding a mix of cash and fixed income
instruments. There are two problems in doing so. First, Steve needs to get out
at the right time and doing so is difficult in its own right. Let’s assume
Steve’s gut feeling turns out to be correct and the market does decline in the
ensuing weeks. Feeling good about himself, he confidently looks at his account
earning money market interest while his friends’ accounts are being depleted.
Steve needs to be careful not to quit his day job too soon and head for that
high six-figure salary on Wall Street, however. His work is only half complete.
Steve now has to make the difficult decision of when to jump back into the
market. This is no small task. Missing the market low and entering just a week
or two too late can prove devastating to long-term results. Missing only the
best performing month each year can make the return of an aggressive growth
mutual fund look more like a low volatility balanced fund. Financial markets
tend to rally in bunches. Missing-out on a significant rally, because your
crystal ball failed to notify you when to reenter the market will make it more
difficult for you to reach your long-term goals.
Becoming fully aware of the risk you are taking with your portfolio will help
you to resist the temptation to pull your money and go into hibernation.
Understanding the expected risk you are taking and following a long-term
disciplined approach will not only reduce your stress level, but it will also
keep you positioned in a manner that will maximize your chances of meeting your
long-term goals.
Investment Management:
The Emotions of Investing
- The Return Chaser
- The Fearful Investor - (Current Article)
- The Effects of Greed
Copyright © 2007 Northwest Advisory Group, Inc.
The views in this article do not necessarily reflect those of the Debt
Consolidation Loan Directory.
This article is for educational purposes only and is not a personal recomendation of any strategy or product. You should not make any changes to your financial situation based only on this article. It is advised that you consult a qualified advisor and tax professional to evaluate your situation before making any changes to your finances.