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Don’t be an emotional investor Part 2

The Investing Course Cycle

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 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 your investments.
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]

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Don’t be an emotional investor Part 2