Investing and emotions don’t belong together. They never have and they never will. In fact if you want a sure fire way to lose money while investing then by all means let your emotions make your decisions. However if you are in it for the long haul and just want to grow your wealth by smart investing then hang on for just a second here and listen to me. If you’re more interested in freaking out over the 634 point drop in the Dow Jones Industrial Average (DJIA) yesterday (August 8, 2011) then please head back to the Debit versus Credit blog and find another post to read.
I tweeted this yesterday after the chaos had ended on the open markets:
Investing and emotions don’t belong together. Ever. If you’re letting your emotions get involved then trust me, you WILL lose money.
It’s as true now as it has ever been. Studies have repeatedly shown that if you let your emotions rule you will always lose money. By pulling out after a large loss you may indeed avoid losing even more, but don’t forget one thing here. If you have your money invested in stocks, mutual funds, etc. it’s all paper losses. You don’t actually lose anything until you cash out. So after the 634 point drop you initiated a sell order for your stock or a mutual fund. Before it wasn’t really a decrease in your cash holdings. Now that you’ve sold it is. Maybe you’ll get lucky — maybe the market will continue to drop another 10-15% before finally rebounding. Or more likely you’ll sell now and the market will rebound by the end of the week. Your paper losses would have disappeared, but you cashed out. So now you’ve really lost money, while those of us who stayed level-headed are back to where we were (much better than a loss isn’t it?).
Here’s the trick to avoid emotional investing
Don’t check your bloody portfolio every day.
Seriously. Especially if you hear about a down day on the market. Don’t check your stocks, don’t check your 401k. Don’t check any of your investments! If you don’t check them you can’t freak out about the “paper losses” and you won’t ever lose to your emotions and do something that will compromise your ability to build wealth.
Another thing. If you aren’t already taking advantage of dollar cost averaging through automatic investing you’re missing out on the ability to take advantage of great buying opportunities. Make sure you get that set up if you haven’t already. Now get out there and don’t let the market volatility freak you out. I’ll be watching.
picture courtesy of Icanhazcheezburger