Editor's Note: We're pleased to announce that three investing columns from MSN MoneyCentral will appear regularly on TSC. On Wednesdays, Jon Markman's "SuperModels" will alternate with Mary Rowland's "Start Investing." Jim Jubak's "Jubak's Journal" will appear each Friday. All three columnists appreciate your feedback at email@example.com.
Here's a question a nervous investor asked in the
Start Investing community in mid-January: "I want to get into the market. But I always worry that it's too high. And then I get cold feet. What should I do?"
I understand the emotions that are roiling inside this person. It's difficult to root out emotions when we make decisions about money, regardless of whether we're buying a new car ("Does it look racy enough?" "Will I be safe?") or life insurance ("Why should I waste my money when I'm not going to die?").
But investing brings out special fears because we know we have so little control over what happens to our money in the short term. It feels sort of like throwing it over a waterfall.
I'm going to tell you about certain emotional triggers that can set your heart pounding as an investor. And then I'm going to tell you how I just survived one of them. In three steps, I'll show you how to control your emotions and use them to your advantage to buy stocks and mutual funds, how to create a sell discipline while not getting sucked into the market's volatility and, finally, how to rebalance your portfolio when your portfolio rises rapidly.
Use Dollar-Cost Averaging
The process begins before you take the plunge into the market like the discussion-group member mentioned above. The best solution is to set up an automatic investment plan and move slowly into a stock or a mutual fund, putting a predetermined amount of money into it every month.
That's what Jamie, one member of our community, did with the
T. Rowe Price
Science & Technology fund. He knew he wanted to be in tech. That fund suited him best. And he knew that if it dipped, he would be adding more shares at a lower price.
Don't Let the Market Spook You
The second hurdle comes when your investments take a hit during a market swoon, such as what happened in late January. This is a necessary boost up the learning curve; it certainly happened to me. I made the classic beginner mistake: My first stock purchase was based on emotion.
Here's what happened. Back in 1987, I sat on the sidelines, watching the market go up and up and up. In August, I went to a press luncheon at
Drexel Burnham Lambert
and listened to stock guru
Abby Joseph Cohen
tell us that the sky was the limit. I looked warily at the list of stocks Drexel recommended.
I went home and bought 100 shares of
at 33 apiece. In October when the market crashed, my $3,300 shrank to $2,300. I was depressed. I felt stupid.
Then I made the second classic beginner mistake: I believed that I must wait until I was whole or "even" again, that if I held American Express until it got back to 33, I would have no loss.
Now that I've studied behavioral finance, I see this to be foolish behavior spurred by regret and the unwillingness to acknowledge a mistake or a loss. The proper action would have been to analyze the prospects of American Express at 23 a share -- at the interim levels -- and decide whether to hold or sell. There is nothing magical about the price you paid for a stock.
After American Express, I promised I would never buy stocks again, only mutual funds. I kept that promise for more than a decade. Then a couple of years ago, I began to get disillusioned with funds (see "
5 Reasons to Dislike Mutual Funds") and I put my toe in the water again, buying some stalwarts like
, the publisher of
. At the end of 1998, I moved fairly aggressively into stocks, selling off a number of my poor-performing mutual funds.
I've been much savvier about investing this time, riding the ups and downs, confident that my stocks will grow over the long term. That's what you have to do as an investor: Become comfortable with your investment strategy and not get spooked by the market. And when you do . . .
Balancing Your Portfolio Calms Your Emotions
Last month, I hit another emotional trigger, the one that comes when your portfolio reaches a certain size, perhaps a dollar amount that you never expected to see under your name. It might be $25,000 or $100,000 or, maybe for some people, $1 million.
You look at the number and your cool head grows hot. "I don't want to lose
of this money" is what you think. "Should I bail?"
The answer is no. If you don't stay in the game, you lose the upside. But whenever an emotional trigger is pulled, you should take a look at your portfolio. Make certain that it is balanced, that it isn't too heavily weighted to just one sector or one stock.
And that's what happened to me Jan. 20. My portfolio had reached one of those milestones. Naturally, I was pleased. Yet, two things worried me for 2000 as I wrote in my
year-end column: interest rates and oil prices.
That Friday morning, I read Floyd Norris' column in
The New York Times
. I'm a fan of Norris, and he warned that he thought interest rates were on the way up -- big. On the same page, I read a piece about rising oil prices. Did I have an emotional reaction? You bet.
I pulled out my portfolio and took a look at it. More than 75% was in individual technology stocks. Worse yet, nearly one-third was in just two stocks --
, thanks to huge run-ups both had last year.
I decided to get a grip on my emotions, but I also decided this was a chance to rebalance my portfolio and lessen my angst in the process. I lightened up on tech, selling one-fifth to one-third of my holdings in Cisco, JDS Uniphase, Qualcomm,
For me, the risk was too great. I knew that if the market caved, I would regret not trimming these stocks. I never intended for tech to dominate my portfolio. A year ago, it consumed about 35%. So the move felt right.
The rebalancing also allowed me to put some more money in energy, which I think is a good play right now. In late January, when the market started to crumble, I bought
at 63. Naturally, I felt great at week's end when I saw that the JDS Uniphase I'd sold at 233 was trading at 195 7/8 and Qualcomm, which I dumped at 155, was at 110. (The only gainer was TranSwitch, which I sold at 46. It finished the week at 51 11/16.)
But you must be able to live with your decisions no matter which way the market goes. I simply had too much riding on too few stocks. So this emotional trigger led me to rebalance.
It paid some quick dividends. When the market sank, I had ready cash to look for new opportunities.
Mary Rowland is the Start Investing columnist for MSN MoneyCentral. At time of publication, she was long Cisco Systems, Intel, Microsoft, Qualcomm, JDS Uniphase, TranSwitch, Enron and Vitesse Semiconductor, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
Rowland's Watch Portfolio