Of course, as a smart shopper, you want to buy clothes, shoes, cars, furniture, travel--you name it--when it’s on sale. It’s just good sense. Everyone likes to get a deal. So you check the item to make sure there are no holes, tears or any other type problem and make the purchase.
Out The Window
However, for many people, that same approach is tossed out the window when it comes to buying investments. Why? In a word, fear. Specifically, fear of breaking with the crowd and fear of losing the wealth you’ve worked so hard to build. It certainly doesn’t help that when the markets do what they do--fluctuate--the media jumps in adding another layer of euphoria when markets are soaring or doom and gloom when they are plummeting.
Fear coupled with a view of investing as more gambling than mathematics means go-with-the-flow investors are missing out on an opportunity to purchase solid investments at a discount. Investing is not like taking your chances at the casino. It’s a numbers game. History tells us if you invest, you will make money. If you have money that you won’t need for the next couple of years and invest today as markets struggle, you will be rewarded for having picked up some bargains that you can sell when markets recover--and they will.
Keep Emotion & Fear Out
Here are a couple of tips on how to keep emotion and fear out of investing:
Know your investing style. When the market is down, as it is now, value investors sweep in and buy good companies at cheap prices.
Understand the cycle of market emotions. Picture a rollercoaster ride that starts and ends with optimism with euphoria and despondency making up the middle. The fact is, when the market is going up and up, it’s easy to think the good times will never end until they do. The same is true when stock prices are falling. Small wonder people buy and sell at exactly the wrong time. When retail investors are giddy with excitement, the cycle of market emotions tells us this is the point of maximum risk. When everyone is angry and panicked, this is the point of least risk.
Consider the fundamentals. When stocks are discounted, the kneejerk reaction is to assume something’s wrong with the company. This is typically not the case. Do your homework. Look at the investment’s track record and earnings. The reality is values get affected by outside forces and what’s going on in the world. If the fundamentals are solid, buy.
Look beyond the individual company. It’s no secret that energy stocks are the lowest they’ve been in years. In this case, there’s a reason. The sector as a whole is in transition. More oil is available from more sources today, which doesn’t bode well for future returns. Individual companies are going to have to change to cope with this current environment, as has been happening now.
Bottom line, knowledge is power and a key tool in keeping your emotions in check when investing.
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read all articles in Allan Small's Prime Earning Years Series ----------
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