This is going to be kind of a ‘squishy’ tip this week. I cannot give you very specific advice, because much of what I’m going to talk about depends on your own feelings.
We are not automatons. We have emotions. We are moved by greed and fear. Often when it comes to investments, those emotions steer us in the wrong direction. It’s fine to say you‘ll be very logical, but it’s tough to just stand pat (or even buy more) when things are scary. It’s equally difficult to decide to sell when everyone is saying how great your stock is, because of those pesky emotions. You have to live with your emotions every minute of every day. Enough days of having a sick feeling in your stomach or of not wanting to let the euphoria of that successful investment go, and you may make what logic tells you is the wrong decision.
So here is what I suggest. Sit down and take a hard look at what a robot would do with your investments. If you feel comfortable with the robot‘s decision, no changes are needed. But if you’re scared or excited, I suggest making a few changes to bring that emotion down to a dull roar. What kinds of changes? It could be selling part of your position. It could be switching to a little safer investment. It could be cutting back on expenses so you can weather a storm better. It could be getting second and third opinions from people that you trust. Think about what is going to keep you from selling at what you know is the wrong time, or hanging in there too long when it’s time to sell. Figure out what will work for you.
Example: In late 2008 when all hell was breaking loose, one of my clients (I’m talking about you, Ms. W.), called me up and said “I know things will eventually work out, but we’re really worried about the market. So sell enough stocks to raise $50,000 in cash, so we know we have that cushion”. That was a brilliant way to manage the situation. Taking enough money off the table so that she knew there was emergency money available, but allow most of the money to stay invested.
We can’t ignore our emotions. But we can manage them so that they don’t make us do the wrong thing at the wrong time.