Did you panic and sell your investments after the terrorist attacks of Sept. 11? Are you holding on to losing investments until you get back to the break-even point?
If you've made these mistakes or something similar, you might be letting your emotions run away with your portfolio. Here are a few simple steps you can follow that can help you stay with your plan and make decisions at less emotional times.
1. Spell out your game plan.
If you have a decent plan, this shouldn't take long. Simply state your goals in a few sentences. Then, for each investment jot down a few bullet points on why you bought it and why you'd consider selling it. The three things I watch for in any fund are strategy change, manager change and severe long-term underperformance.
2. Match your investments with your goals.
One of the reasons investing can get stressful is that people put short-term money into securities designed for the long term. I'd lose sleep, too, if the money I needed to buy a house with in 18 months was tied up in stocks or stock funds.
People who make this mistake are more likely to give up on equities. Don't blame the markets if you used them poorly. Equities are fine for goals that are five years or more away, but money-market funds and bond funds should be used for shorter periods. For the house that's 18 months away, I wouldn't get any riskier than short-term bond funds.
3. Do regular checkups.
In basketball, coaches and announcers often talk about how important it is for a team to play at its pace and not be forced to play at its opponent's pace. You can do something similar in investing. If you set aside a time every month or quarter to review investments, you'll be doing it in a calm, familiar setting rather than reacting to the latest bad news. You'll also feel a lot more confident about your investments the next time something bad happens.
Say the stock market gets spooked by an overseas currency crisis. If this happens two weeks after you've read your funds' latest shareholder reports and reviewed how they are doing on the key points you listed for buying and selling, it will be easier to stay the course.
One of the reasons investing becomes emotional is that we ignore our portfolio for too long and then find ourselves in a huge mess that seems too hard to get out of. Regular checkups will reduce the work to bite-size tasks that you can get your arms around.
4. Rebalance yearly.
You knew this was coming. Even investors who know they should do this have a hard time doing it. They get greedy and want to hang on to their winners or they get scared and don't want to trim their losers. In either case, you need to rebalance or you'll get way off your plan. The sooner you rebalance, the easier it will be in the future.
5. Use investing tools.
One of the great things about the Internet is that it has made these tasks easier than ever. Portfolio tools can also help you take some of the emotion out of the equation. These tools make it quite clear to see how diversified you are and some can also let you know if you're on track to meet your goals.
If you've tried doing these things and you're still a wreck, or you're still making emotionally based investing mistakes, then you're ready for a financial planner. Sue Stevens, director of financial planning for Morningstar Associates LLC, has written a great piece on how to find a good one. Sure, they charge fees, but a good adviser is a bargain if your investments have made you a wreck.