Dollars and Sense: Down-to-earth information about money and investing
Thursday, April 26, 2012
The Psychology of Investing
Buy low, sell high. We have all heard the mantra. But, what happens when you buy an investment, it goes down and down, and when do you sell it rather than continue to take losses? Well, you actually have not lost anything (or gained anything) until you sell. So, on paper a stock may be down 40%, but if you hold onto it, there is a chance it will bounce back. When the market overall is down, we don't seem to hear much about buying. When it is up, people often become enthusiastic about investing. But, in fact, that is just the opposite of what we should do. It makes me think of the Seinfeld episode where George Costanza made it his mission to do the opposite of everything he normally does. Did it work? Yes, to some degree, but of course that approach can be taken too far. Do you want to do the opposite of Warren Buffet or the complete opposite of everything that is recommended in Forbes, Kiplinger's or The Wall Street Journal? No, that would be foolish. Sometimes it is hard to admit we have made a mistake when watching an investment we have purchased, and we tend to hold on to bad investments, in hopes that they will bounce back. If a stock has strong fundamentals and it seems to be just a temporary slump, then hold onto it. Other times stocks will go down and keep going. I bought GM a few years ago, never dreaming it would go bankrupt, but it did and I rode the stock all the way down. Maybe selling at a 10% loss would have been better than dealing with a 100% loss. No doubt, it would have been better. My Toyota (TM) investment is down 35%, but I think it will come back eventually. The natural disaster in Japan and the recalls and lawsuits hurt the company dearly. But, it will come back (I hope). Say you have a stock that is up 20%, but you don't want to sell, hoping it will keep going up. Sometimes it is better to take your gains and get out. But, I can't make those decisions for others. Do your homework by checking out news articles about the company, look at the financial statements, examine the transactions by insiders such as corporate officers and see what the experts are recommending. It can be a bumpy ride, but if we ride out the ups and downs over the long haul, most people do well. Those who are against taking chances with their portfolio should probably stick to mutual funds, which will automatically diversify the investment decisions and lower the risk for you.