A worrier needs to develop a system that involves making major
decisions once, and only minor adjustments from then on--a system that
will minimize investment anxiety. The best way to do this is to create a
written plan for each investment that relies heavily on "stop/loss"
orders--orders to sell if the price drops below a certain level. Using
stop/losses is important because of the worrier's impulse to sell
irrationally when the stock goes up and to hold on irrationally when it
goes down (in the hope that it will rebound dramatically). The plan
involves writing down the reason for purchasing each stock, the stop/loss
levels, and then entering them with a broker. The plan takes
decisionmaking out of the person's hands and worry is curtailed.
Similarly, write down what you expect your mutual funds to achieve.
Evaluate the funds every three months--but no more than that
Another way to reduce anxiety about investing is not to listen to
too much market information. Limiting market reading, television viewing,
and stock-table consulting can help. And stay away from TV programs where
panels of Wall Street experts offer opposing opinions; the divergence of
opinion can produce further anxiety.
Finally, it's important to let the pleasure in. Investing is meant
to be an emotionally as well as financially rewarding experience. Once
worry is contained, it can lead to the winning financial results that a
conscientious investor deserves.
INVESTING ON IMPULSE
Impulsive investors tend to buy a stock because they have an
intuition about it. They are particularly attracted to companies that
appear glamorous or are in the news. The danger of this "love at first
sight" approach to stock picking is that one can fall out of love just as
quickly, and sell in a way that is certain to lose money.
An impulsive investor must allow for a period of investigation and
reflection before acting on feelings. The rule is that you can fall in
love at first sight--but you can't buy at first sight, ever. Information
to help you investigate companies is readily available. Many libraries
carry the Value Line Investment Survey, a weekly report which ranks
stocks and comments on them from a business point of view. Additional
information can be obtained by getting a company's annual report.
After doing this research, if the investor still wants to invest in
a company, he or she should write down expectations for its performance
over the next year and his or her standards for selling. Reviewing those
standards every month or so will counter feelings that can lead to a
decision to sell precipitously if the stock declines temporarily or
doesn't produce positive results quickly.
A money manager can be extremely helpful to an impulsive investor,
provided that the relationship is kept objective, and that the investor
does not idealize the manager as a financial Prince or Princess Charming.
A money manager can help such an investor set up and stick to a
long-range investing plan and keep him or her on track--and off
impulse.
POWER PLAYERS:
INVESTING TO IMPRESS
If power is important to people in their careers and personal
relationships, it will take center stage in their investing life as well.
Because of their high energy levels and lack of fear, these people often
do well in a strong market. But in a market decline, they suffer
disproportionately because their investment choices tend to be heavily
weighted toward speculative and overvalued stocks. Their emotional
suffering is disproportionate, too, because they lose self-esteem as
their stocks fall.
The greater our quest for self-esteem, the more likely we are to
become power investors. Even though we may be successful, likable, and
seemingly self-confident, bubbling beneath the surface there can still be
issues of esteem that make us vulnerable.
There are several things a person can do to counter this
vulnerability. The first is to make sure the stock market does not become
the main area for building self-esteem. Reinforcement should instead come
from family, work, friendships, and community ties. Second, the power
investor should develop a balanced portfolio. This means limiting
speculation and choosing stocks of companies that have products on the
market--and thus, a record of profits, earnings, and rate of
growth.
Like the impulsive investor, the power investor must also make it a
rule to investigate a stock as thoroughly as possible and hold off at
least 24 hours before buying it--even when a broker is putting on
pressure to buy now. This allows for time to stand back, investigate, and
gain some emotional distance from the stock.
After buying a stock, it's critical to evaluate it periodically to
see whether it still meets the expectations set at the time of purchase.
Power investors tend to resist this process because judging stocks seems
like self-judging. This is when the investor must remind him or herself
that he or she has invested in businesses, and the value of a portfolio
will depend on the businesses' success. The essence of investing is using
money rationally to ensure or increase our physical comfort, rather than
to promote self-esteem. If we think of investing in this way, power
issues shrink. In the financial market, the less powerful we try to be,
the more successful we can truly become.
MARKET GAMBLERS:
BLUE CHIPS ARE DOWN
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Investing,
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