By Craig Erwin, Ph.D.
My son and my wife are begging me to liquidate his mutual fund before it is too late. They fear that the Federal Reserve, the U.S. central bank, will raise interest rates so high that it will destroy the economy and make stock prices plummet. Their fears are real, but the risks aren’t as great as they think.
The fact that that my wife and son want to sell so badly tells me that it may be a good time to buy more stock. I bet many stockholders would love to sell it now to end the pain they have experienced this year.
Why not sell now? First, we are rapidly approaching that part of the year when stocks tend to outperform, the end and beginning of the year (according to the Stock Trader’s Almanac). Second, if you sell now, you lock in your losses instead of waiting for a rebound to let you sell higher. Always sell stocks when their prices are above, not below, what you paid for them.
When you let emotions drive your decisions, you often do the opposite of what’s best. When you are fearful, you want to get out of the market and stay out, no matter the cost. But that violates your reason for investing; to make money.
Greed and fear bite. The recent overheated housing market had buyers offering far too much money for fear of missing out. As home prices fall in the next year, many new owners will regret that they overpaid. Greed makes you buy when you should sell and fear makes you sell when you should buy.
Prudent investors are buying stocks now because they are cheaper than at the beginning of the year. Emotional investors are selling everything, planning to stay in cash until the economy and stock market rebound. But, if you sell everything, it is likely that you won’t have the courage or wisdom to get back into the market at a good time, if ever. Plus, stocks will probably be pricier than when you sold them.
So, stay the course. Don’t let emotions lead you to do something you’ll regret. Emotions can be deadly when you are investing. Save your emotions for the theater.
Do your emotions interfere with your investment decisions? Are you fearful of the current state of the economy and the stock market?
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