By Craig Erwin, Ph.D.
Optimism feels good and it can lift us up when things aren’t going well, but it can cause problems for investors. Optimism may lead us to ignore risks and expect unrealistic results. Pessimism, on the other hand, may cause us to miss out on great investing opportunities because we are unwilling to take any chances.If you buy stock, that means you own part of a company. You may sell your stock the same day or hold onto it forever, but as long as you own a company’s stock, you are an owner.
Let’s see how optimists and pessimists view stocks. If an optimist chooses stocks, she may decide to buy a stock based on a compelling story. Perhaps she heard that there is a looming shortage of computer chips. She may also neglect to conduct a thorough analysis, which is needed to determine if the stock is cheap or expensive and if the company’s future is bright or dim. She just falls in love with the company and she is sure she has picked a stock with bright prospects even though she has little evidence. The pessimist, on the other hand, approaches companies and their stocks cautiously as if she is from the Show Me State (Missouri). She conducts extensive analyses and will reject stocks unless they pass all of her rigorous tests. The last thing she wants to do is make a costly mistake. So, a pessimist is like a Human Resources Manager scanning resumes. She is looking for any little reason to reject a stock, unlike an optimist who never met a stock she didn’t like. Obviously, if you are too pessimistic, you will never buy anything because nothing will ever meet your high standards. I have a friend like that – she analyzes stocks and always determines that they are too expensive, so she never buys anything.
A good way to keep your optimism or pessimism from hurting the performance of your investment portfolio is to dollar-cost average. To dollar-cost average you might invest in a stock index fund with a portion of every paycheck. You just keep buying no matter what the stock market does and no matter how good or bad the news is. If you just keep buying regularly, sometimes you’ll pay too much and sometimes you’ll get bargains, but on average you’ll pay a fair price. Plus, you won’t have to worry about whether your optimism or pessimism are steering you wrong.
Are you an optimist or pessimist? Have you noticed how your optimism or pessimism have affected your decisions? Are you dollar-cost averaging?
For more information on dollar-cost averaging, investing, or the stock market, click on the following links: