The last ten years or so have seen the investment markets take some wild swings and cause many a sleepless night for investors.  While there have been opportunities along the way it was, and is, necessary to take a disciplined approach to investing in order to succeed.

We rode an emotional high throughout much of the 1990’s when investing seemed easy and even throwing darts at the Wall Street Journal made money.  Unfortunately, the herd mentality grew very strong during those years as people let their emotions and not their heads drive their investment decisions.  Talk of bubbles began to crop into investment literature as stock markets (especially) ran to new highs.  Individual stocks, such as AOL (American Online), seemed to dominate the news.  In fact, as we entered the 21st Century, some stocks like AOL were trading at astronomical PE ratios with no realistic measure of earnings to back them up.  AOL traded at something like 240 times earnings and it was said that it would take hundreds of years of actual earnings growth to justify those levels.

Locally, Sonic Foundry (SOFO) was a high flying success story and saw its stock trade well over $100.00 per share during the early part of the year 2000.  But….

Did anyone hear the boom?  The bubble burst and stocks like AOL and SOFO plummeted.  In fact, Sonic Foundry saw its price fall below $2.00 per share later that same year.

What happened?  Emotions are what happened.  Everyone got all excited and forgot about using fundamentals and their head!  Mutual fund families like Janus got caught up in the excitement as well when they loaded up many of their funds with the same stocks (they were one of the largest holders of AOL). 

Then came the recession, the dot-com bust, 9/11, and the markets went south and so did investors attitudes.  It took several years before investors fully came back and just when everything seemed to be going right the housing and credit bubble burst and we faced our first lost decade in terms of investment returns.  What happened?  Emotions are what happened.

Now it seems that investors are skittish to go back in even though the economy has come through the recession, the markets have come a long way off of their lows, and the economy seems to be gaining some traction.  Of course only time will tell if the economy can sustain itself.

What we have found out is that the herd mentality works both ways.  Up during the 1990’s and down for a good chunk of this century’s first decade.

While it is tough to stick to your guns and it is ok to make adjustments that are warranted by what is going on in the economy, it isn’t the best policy to let your emotions takeover during turbulent economic times.

Investing requires discipline.  Knowing why to buy and why to sell are important decisions that should be thought through prior to making any moves.  Diversifying across investments and asset classes can help minimize risk.  Don’t focus primarily on the media as the more sensationalist items are going to get the biggest headlines.  Finally, determine what your proper asset allocation should be.  This can be done by analyzing your current financial situation and by getting a handle on how you handle the positives and negatives of life as those emotions will certainly spill over into your investment life.  I call it my “sleep at night index” where you shouldn’t (at any time) be investing more into riskier assets than what you can handle both financially and emotionally and by what allows you to actually sleep at night without worrying about your portfolio.

Take stock of your emotions and then work on your portfolio!

How do you handle your emotions and make investment decisions?  We’d love to hear from you!


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