Avoid The Greatest Investing Pitfall - Don't Trade On Emotion Or Gut Feelings Alone
Published 12/20/07 (Modified 3/8/11)
Are you like chicken little? Are you currently huffing and puffing because you feel like financial ruin is just around the corner and that current market problems suggest you should take quick action? Well, try to relax and see the big picture. Yes the stock market has experienced quite a bit of red lately and the foggy road ahead appears to be quite bumpy, but that doesn't mean it's time to make hasty decisions.
The year is coming to a close and many anxious and disappointed investors are starting to react in predictably panicky ways. While some people want to sell off a portion of their holdings to capture tax losses that can be used to offset their current year's capital gains for tax purposes, others are reacting in more hasty and emotional ways. Those who push the red panic button now and act on this heated emotion might regret their decision down the road. Smart financial decisions were never made by people in the midst of an emotionally driven haze.
The Mortgage Mess and the Credit Crunch Are Causes For Concern But In Time They Will Pass
Yes this is a scary time for short term investors but we must tread with a firm and loyal commitment to the key to successful compound growth - long term investing. While the housing market meltdown was not entirely unforeseen, I will admit that the severity of the credit crisis was unexpected. Starting with Countrywide Financial and later progressing to Etrade, financial institutions that owned and traded subprime mortgage backed securities have been hit very, very hard (we're talking about 80% drops). With housing prices continuing to tumble, and owners no longer able to refinance their way out of financial problems, the financial and housing markets continue to deteriorate at a pessimistic pace, dragging the rest of the stock market down with it.
Stay The Investment Course If You Have Market Confidence For The Long Term
Despite this gloom and doom, I think the market will be resilient enough to bounce back in due time. The economy will slow but it will not sputter into a nose dive towards recession. I know many are predicting a recession, but frankly I think the economy remains fundamentally strong. We are certainly entering a period of significant slowdown, but I doubt we will experience negative growth, which is what a recession is.
The current losses of $200 billion caused by the credit crisis really only comprise a mere 2% of all bank credit and the Federal Reserve still has the power to cut rates further to inject activity and life into the market. This is not to say that all investors will survive the grim short term. Those that invested heavily in financial stocks with connections to the subprime mortgage market will be financially destroyed and it will probably take many years to recover those significant losses, like during the internet bubble of 2000. During the dot com bust, I lost a relatively sizable amount of money to the internet bubble burst, but eventually I did recover and have managed to thrive since then.
It may seem very counter intuitive to all of the signs in the financial markets and fly in the face of current realities, but those that can remain brave, resilient, and maintain a long term perspective will ultimately reap the financial rewards. Like a financial bomb that has just been detonated in the city, wiping out previously free standing structures and stores, the first brave souls to venture back and set up shop will ultimately reap the first mover advantages. Perhaps more trouble is yet to come but with the way the markets have been depressed, it is inevitably the time to buy and hold for the long haul. Will the markets bounce back by next year's end? Only God knows since it's nearly impossible to time and predict the market. But truly, it's hard to blame anyone for being spooked and refusing to dive in when the waters are still murky.
I myself will remain in the market waters for the long haul. Some may have climbed out to safety but I have continued to steadily but cautiously maintained and even slightly increased my positions in bargain stocks and beaten down funds. The largest portion of my investment portfolio is invested in foreign emerging market funds like the Fidelity South East Asia Fund (FSEAX), and the Fidelity Latin American Fund (FLATX). The rapidly growing markets of Brazil, Mexico, China, and Korea are where I believe my financial investments will pay off the most in the long term.