The Model Portfolio

The Emotional Curve Of Investing

Dispatch for the Week of September 14, 1998

by John Bowen

LEWIS:

We’ve been seeing a lot of gyrations in the stock market in the last couple of weeks. It’s not always easy to hear that your portfolio has lost

a lot of value, even if it is just on paper.

JOHN:

Do you recall your emotions on the day that the market took a 512-point plunge?

LYNETTE:

I know that the stock market is supposed to go up and down, but I have to confess that I still get butterflies in my stomach when I hear news that the market has dropped another couple hundred points.

JOHN:

Lynette, then think about how you

might have felt if you had just bought a mutual fund for the first time. You were probably feeling a combination of fear and hope. Of course, you were you hoping that the fund you just bought would go bounce back up. And you’d be happy if

it just moved back up to where it was when you bought it, right? At least you could break even and you wouldn’t have to tell anyone about your misadventure. You might even vow never to do it again! But the market — and your mutual fund — continue going down. What do you

do now?

LYNETTE:

Panic?

JOHN:

That’s right, at least for way too many investors. CNBC conducted a

survey of money flowing into and out of the 401(k) marke recently. They

learned that money quickly moved out of equity mutual funds and into fixed income funds on the day of the drop. A few days later, when the market posted a huge advance, money flowed out of fixed income funds and back

into stock funds.

Unfortunately, this is a common experience, especially if you listen to the media “noise.” Media noise is all those headlines that predict the future of the market, or claim inside knowledge about why the market behaves in a certain fashion.

The problem really begins when individuals confuse “speculation” with

“investing.”

LEWIS:

What’s the difference?

JOHN:

With

speculation, you really need somebody with a crystal ball. It may not work very well; but as long as you’re guessing about the future,

you might as well stack the odds as high in your favor as possible. It’s still pretty much a losing game, but it appeals to greed and keeps you riding that emotional roller coaster.

Investing requires knowledge, discipline and a long-term commitment. Like most investors, you two need to remember that you need to have a minimum of a five-year time horizon for your

investments. Don’t trade in and out of the market. Academic studies prove that strategy doesn’t work, and besides, trading costs just chip away at your returns.

LYNETTE:

Thanks, John.

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