Pimp Your Finances

The AP published an article saying that investors are used to wild swings, and are no longer reacting with selling binges.

They tell the story of a few investors who have come to their senses…but are they really good examples?  Let’s take a look.

One investor said:

I certainly had a queasy stomach throughout October,” said the 61-year-old retired lawyer from Vancouver, B.C. “I had to keep saying to myself … These things will pass.

The article goes on to say that “now he’s feeling better….”

Sounds great, doesn’t it?  But let’s take a closer look and see what Mr. Bass did when he wasn’t so calm.

During the darkest days of the stock market’s slide last month, Jack Bass withdrew stock from his retirement accounts

I know Mr. Bass is older, but selling when stocks are crashing can be a deadly mistake. 

Let’s take a look at another of their relaxed investors.

An avid investor from Providence, R.I., isn’t feeling the anxiety he did a few weeks ago at the height of the market scare…

Another good start!  It sounds like he has stopped reacting emotionally, and is thinking of the big picture.  But let’s read some more just to make sure:

…when he shifted $50,000 from stocks to cash in his 401(k) account.

By selling at the height of the scare, he realizes his losses at the worst time.  He may think his funds will continue to drop indefinitely, but it’s more likely that he’s just reacting emotionally, rather than considering any long term implications.

According to tradingsphere.com, most investors tend to sell low and buy high, not because of rational decisions, but because of human psycology and the tendency to chase yesterday’s hot returns.

If that’s not enough, smartmoney.com takes it a step further and says:

An overwhelming impulse to get out, cash out, hide out; it’s all-too human. That’s why it’s a grave error. Emotional investors are poor investors. They buy high and sell low. Today’s market swoon is just the latest perfect trap to lock in losses. Don’t do it.

It goes on to say that if you have two to five years to ride out the downturn, you should stick it out.  After all, when you chose an investment strategy, it was (presumably) a rational, well thought out decision.  You should not abandon your game plan when things start going downhill.

If your strategy needs updating, you still should not pull out en masse.  Instead, take a disciplined approach and adjust your investments over time.  It’s another example of dollar cost averaging.  By changing your allocation over regular intervals, you can protect yourself from fluctuations in the market.

The bottom line is that your investment strategy should not depend on wild swings.  It should be based off of long term perfomance.  If your strategy needs adjusting, it should be done gradually and rationally - not as a knee jerk, emotional reaction to the latest financial news.