The recent events in the stock and bond markets drew everyone’s attention. No doubt you took a look at your investments and, perhaps, worried about one or two. Maybe, you made some changes to your portfolio. Let’s take a look at your experience and see if there are some lessons to be learned.
Did you lose sleep, literally or figuratively, over any of your investments? This is the gut check measure of risk tolerance, not quantifiable, but accurate nonetheless. Investing is not an emotional decision, it takes hard work and discipline, but if you worry too much about an investment, it isn’t right for you. One of the hardest parts of investing is keeping your emotions out of it (i.e., taking a loss or selling your “favorite” stock).
Emotion will only cause you to buy at the market highs and sell at the lows. But, did your gut tell you to sell anything during the recent market correction? Rule number one of gut check investing is: if you lose sleep over an investment, it’s probably too risky for you. How do you know? This brings me to the second rule of gut check investing.
When making a decision to buy or sell a stock, bond, or mutual fund, do your research. Is it a sound company or fund? Does it meet your investment objectives? How would you feel about this investment if the market were headed in the opposite direction? Write down your reasons, put then in a drawer (or store them on your hard drive) and pull them out when you’re thinking about selling.
The purpose of this exercise is to avoid being swept up in the euphoria of a bull market, and making too risky investments, or selling good investments, out of fear, during a market correction. Make your analytical decision, then ask yourself, factoring out the current market emotional climate, does it feel right? If you’re not comfortable, don’t buy the fund, or sell it, if you own it.
This is the gut check buy/sell decision making process. I want to emphasize the sequence. Do your analytical work first, then sit back and see how you feel about it. The gut check buy/sell decision is a one-way process — it can stop a buy, but it can’t stop a sell.
Sleep well. Sweat dreams.