One of the most common questions we ask new clients at Best Growth Stock is “What should you do if the value of your stocks fell by 50%?”. The vast majority of the answers are that they would buy more stocks. It is so common to see how people are more risk tolerance under such conditions. So now that the stock market has lost more than 40% of its peak value from early this year, why are some of these same clients clamoring to sell their stocks?
It is very well know that we humans responds to emotions and our environment in a different manner depending the current situation even if it is the same circumstances. Risk and tolerance ebbs and flows. For example we saw a big economic growth and expansion from 2003 to 2007. The Down Jones Industrial nearly doubles and the international stock prices nearly tripled. During that period of great returns you tend to believe that you have a high risk tolerance. At times like these, your willingness to take chances drops sharply.
You might suffer big consequences from such mood swings. They can lead you to jump in and out of the stock market today chasing good performance with devastating results. A study done by the Journal of Banking and Finance published last year found that investors pay a 1.5 percentage-point annual penalty for that kind of behavior.
You should never rely on a risk questionnaire to tell you how much you should have in the stock market. And I mention risk tolerance only to make the point that hypothetically losing half of your portfolio does not inspire the same fear that actually losing it will.
Remember that your investing strategy should focus and be based on your goals, your time from retirement and what you have in the bank so far. Only you will achieve success if you stick to your plan. But as you are learning buying stock is emotional and at Best Growth Stock we try to profit from such human behaviors and emotions. Your investment represent security and freedom. And as you see your balances decline, you see your dreams fade too. Hence the scary calls.
For sure we can not make any sure promise to our clients or investors buy I never would bet against capitalism over the long run. Chances are, you will look back and see this was the best buying opportunity you did have in your life.
In moments like the one we are living you should push yourself to take more risk than feels comfortable and in good times go out on a limb less than you are inclined to. If you have just discovered that you are not as brave as you thought do not make it worse by acting on your fears.
Category: Business News