RSSFear Continues to Drive the Markets
By Jim Farrish | October 08, 2008 | 10:41 AM | 1 Comment
For more than 20 years I have taught a workshop, “Money Psychology – 101”. The premise behind this workshop is understand the psychology of investing. I cover 7 roadblocks to financial success in the workshop. Number one is dealing with you and your emotions towards money. In fact, we have taken this same workshop and turned it into a newsletter we have published for the last five years. Why am I bringing this up now? No, not to get you to subscribe, but to understand, fear is the primary driver of investment decisions in up markets and down markets. The direction of the market never takes away the emotion of fear. Experience tempers fear and allows you to have confidence in you and your decision making process. Fear never goes away it only becomes tempered by knowledge and experience.
Why is fear in control of the current market cycle? Uncertainty. Investors don’t have enough data to make educated decisions about the future of the economy. When the Federal Reserve is pumping billions of dollars at a time towards liquidity and the Federal Government is spending more than $1.4 trillion of taxpayers’ money on financial rescue plans, FHA mortgage bailouts, and Wall Street bailouts, the future looks very uncertain. This is where the rub for this market lies. The sad truth is, I don’t see it clearing near term. Even with the recent help to “fix” the crisis, short term we are still in crisis mode.
The point I have to make is simple, without a discipline strategy in place, your portfolio and investing will be ruled by emotions. The last thing you want to hear from me is that I am in cash, blah, blah, blah. Me being in cash is based on my strategy, risk tolerance and 31 years of investing experience personally and professionally. If you are still in limbo about what to do with your portfolio or particular investments, I suggest the following analysis:
• What was the strategy behind each position in your portfolio?
• Why did you buy it? Is the reason still valid?
• What was/is your stop?
• What was/is your target?
• If you can’t answer these questions logically and distinctly, exit the position and start over with a defined stratey.
As an investor, it is vital to be able to answer these questions at any point about your portfolio and the positions within your portfolio. Recently I went through a series of posts on Bank of America (NYSE: BAC), a position in my portfolio. The reason I purchased the stock changed when they announced their acquisition of Merrill Lynch (NYSE: MER). I wrote five pieces explaining my decision process and management of that position to assist you as investors on how to manage your money. The last piece was posted yesterday explaining the sell process. I was stopped out as Bank of America after they announced earnings early and they were not pretty. Today the stock is trading down nearly $13 or 40% below where my stops executed. That does not make me a good investors, it makes me a disciplined investor. What if I had no stops in place? I would be left with making an emotional decision today. That is the psychology of money management, having a strategy to manage your money logically so that you don’t have to manage your money emotionally.
Fear is in control of the market. Logic is nowhere to be found and if it is, most will ignore it at this stage. Clarity and a dose of certainty/confidence will establish the bottom and create the next opportunity. Until then protect your money. It is never too late to sell and establish a disciplined strategy for moving forward to manage money.
| 
|
Comment (1) | Related Topics » The Market | Farrish Files | Economy | Financials | ETF Trading Ideas
|
