Thursday, November 15, 2007

Another Investing Pitfall: Losing Your Nerve

Pundits, friends, and acquaintances confidently drone on about interest rates, the balance of trade, commodity prices, and the impending doom in the stock market. History tells us that when stock prices have been falling, the negative predictions increase. There is no reason to believe that these people know any better than anyone else whether stocks will go up or down in the short term. Anyone who could actually predict where the stock market was going in the short term could easily make a fortune fast.

Some successful investors say that one of the best times to buy is when the masses agree that stocks are doomed. This barrage of negative news about the stock market leads to a common problem for nervous investors: selling when prices are low. If the stock market then rallies, these investors lose out. I’m not advocating waiting with your cash until the world seems to be crashing down and then buying in either. This kind of market timing works for few people.

If your investments are keeping you up at night, it could mean that you are listening to too many predictors of doom, or that you have too much of your money in stocks rather than bonds. As long as you don’t need the money for a few years, there is no reason to be nervous about short-term market fluctuations.

For another investing pitfall, see the next post.

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