Investing Psychology - Know Thyself
America will continue to be the land of opportunity and
regardless of what course our economy takes over the next few
years, it's likely that investment opportunities will be
numerous and attractive. Companies driven by the ever increasing
advancements in technology will emerge, while older companies,
out of necessity, will come forth with new products. One
industry or another will enjoy a boom period relative to the
rest. And, of course there will be casualties - there always is.
For the astute investor there's always opportunities to buy
investments (stocks, bonds, commodities, mutual funds, etc.)
before "the crowd" finds out and it's already over-valued or to
buy a so-called "blue chip" temporarily out of favor, at a
depressed price.
In many instances, the differences between great rewards and
huge losses are subtle. However, before you can embark anew or
jump back into the game you must ask yourself several questions
wrapped into one.
They can be lonely questions because only you can answer them.
It involves not only how much money you feel comfortable
investing but it also takes into account the level of risk you
are comfortable with.
First, does your financial condition permit you to invest;
second, can you assume the current risk implicit in the markets;
and third, is the market a safe place for you to be. Let's take
them one at a time.
Your Financial Position One point should be made clear at the
outset: you don't have to be wealthy to invest. In the past,
insiders have trumped the belief that stock ownership is a rich
man's game but with approximately 50% of american households
currently in the market that is no longer the case.
The goals of the small investor is not of enlarging their
fortune because clearly they currently don't have one but to
make available some money, however small, for the purpose of
growing it over time. Regardless of your income level,
investment is possible if three conditions are met:
1. If you are relatively assured of a steady income. Of course,
these days nothing is set in stone. 2. If you are meeting your
current household expenses and obligations. 3. If you have cash
reserves with which to meet unforeseen emergencies. You have to
decide how much but I would suggest enough to cover 3 months of
living expenses.
Of course, these conditions are simply safeguards due to the
inescapable fact that stock prices fluctuate and that your
judgment of when to buy, when to sell and how long to hold
should never be dictated by outside circumstances. Investment
should be undertaken only with funds you can honestly and
legitimately earmarked as discretionary.
A reserve also enables you to pick and choose. Whether you have
a few hundred or a few thousand lying around should not
automatically mean that it's time to invest it. What's the
hurry? As the professionals say, "The market is always there."
If the trend isn't to your liking or price's are over-valued a
reserve allows you the luxury of waiting for more favorable
conditions.
Finally, a reserve permits investment over a period of time
rather than all at once. Some "experts" feel you should back
what seems to be a good situation with all the investment funds
at your command. Others will warn against greed and advise
partial investment to spread the risk.
This article is not the place to discuss the merits of either
philosphy. The point is to give yourself the flexibility of
moving whatever way "your" judgment dictates.
Your Personal Situation Your age, health, the number of
dependents you support, the kind of job you have, or the type of
goals you have set for yourself are just a few of the possible
factors that will weigh into your investment decisions.
Unfortunately, there is no rule, no prescription, no secret
formula to follow.
The story is told of two salesmen who met at the airport. Their
conversation went something like this: "How's business?" asked
the first. "Oh, very good," said the second, "and yours?" "Fine,
fine," said the first. "I got orders for a thousand gross last
week. I sell buttons." "Really," said the second. "I've had one
order in the last three years." "and you call that good?" said
the first. "Actually yes," said the second, "I sell suspension
bridges."
Like the salesmen, the investor must have a clear notion of his
goals and expectations and they must realize what is normal and
acceptable to someone else might not be what is normal or
acceptable to them.
What Kind of Person You Are Consideration of your investment
goals brings up the final point of personal evaluation - You.
Very simply because your goals are a reflection of your
temperament and personality.
You must go beyond your goals and pin down the traits and
characteristics they stem from. Are your goals realistic? How do
you regard money? How do you handle it? Are you easy-come,
easy-go or do you count pennies? Are decisions involving money
difficult for you to make? Are you on top of your budget or
always running to keep up?
These are generalized questions and there are no absolute
answers. Speculators should stay out of the market, but on the
other hand, being a tight-wad is no virtue either. An overly
cautious or conservative temperament may not be well-suited to
react to the ever changing market conditions and thus miss out
on opportunities to sell or buy.
The value in knowing thyself and how you will likely respond in
a variety of financial situations is vital. Any personality type
can count profits but it requires a certain rigor, a certain
fortitude to face up to the adverse situations that investing
unveils. If you have a character flaw, losing money will quickly
expose it.
In a now famous pronouncement, the elder Morgan stared at a
questioner who wanted to know what stock prices would do and he
said, "They will fluctuate." The statement is as pertinent today
as it was then. As a result, the question you must ask becomes,
"How will I respond when they do?" If you "Know Thyself" you'll
have the answer.
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