Enrolment in investment courses ebb and flow with
the stock market.
From early 1997 until early 2004, I taught an investing course at the Portland
Community College in the United States and I saw first-hand the full cycle of
investor emotions. My first classes averaged around twenty students but just
before the dot.com market peaked around late 1999, I had over seventy students
enrolled in a single class. I remember that time well as we had no more chairs
and students were standing in back of the room. All eager to learn about buying
stocks and funds right as the stock market was making a peak (Euphoria phase).
From then on until early 2003, enrolments in my investment classes not only
became as volatile and uncertain as the stock market and the geopolitical
situation at the time (e.g. the 9/11 terrorist attacks and the wars in Iraq and
Afghanistan), they also tended to trend downward.
At the bottom of the stock market in early 2003 when the Dow was at the 8,000
level or below on the eve of the invasion of Iraq, only one student enrolled in
my investment course. And while the stock market had largely recovered by 2004
with the Dow spending most of that year above the 10,000 level, enrolments in my
investment class remained low - averaging only 10 to 20 students.
SUBHEAD: How to Avoid Being an Emotional Investor
So are you an emotional investor? If you find yourself trying to time the market
by investing only when the news is good and selling only when its bad, you are
probably an emotional investor.
For that reason, a good way to avoid such an emotional investor trap if you are
still working and investing for retirement is through dollar-cost averaging.
Under this strategy, you will invest equal amounts of money at a regular and
predetermined interval irrespective of the direction markets are moving in.
By doing this in a stock market that’s falling, you will end up purchasing more
and more shares at cheaper and cheaper prices. Likewise and in a stock market
that’s moving upward, you will be purchasing fewer and fewer shares at higher
prices. However and in order for dollar-cost averaging to be effective, you must
have the discipline to stick your investing strategy and avoid changing or
tampering with it - unless conditions absolutely warrant it.
Another strategy to avoid becoming an emotional investor is to have a properly
diversified portfolio because in normal bear markets, not every sector or asset
class will be falling. For example: Stocks tend to outperform bonds in bull
markets while the reverse is true in bear markets.
The exception of course was during the height of the financial crisis when just
about every sector or asset class was falling as most investors became emotional
investors and panicked. However and by having your portfolio spread across
different asset classes, different sectors and different geographies, you will
have some piece of mind and avoid the pitfalls of becoming too emotional with
Finally, it’s worth noting that investors tend to become emotional when they get
caught up in any emotional hype created by the media. Remember, the financial
press has a tendency to be perpetually bullish while the mainstream media tends
to only emphasize reporting about the stock market when it is at peaks or
troughs. If you would like to discuss how to invest without making decisions
based on emotions, feel free to give me a call, email or hit me up on Skype.
Don Freeman is president of Freeman Capital Management, a Registered Investment
Advisor with the US Securities Exchange Commission (SEC), based in Phuket,
Thailand. He has over 15 years experience and provides personal financial
planning and wealth management to expatriates. Specializing in UK and US pension
transfers. Call 089-970-5795 or email: [email protected]