Published August 2001

Use head, not heart, when
it comes to stock market

By Eric Cumley
Columnist

Each of us has a wide range of emotions, and in many cases it’s important to express them — but not in the investment arena. In fact, emotions such as greed and fear can do serious damage to your investment plans.

How? Let’s look at greed first.

Contrary to what you may have seen depicted in movies about Wall Street, greed is not good. Suppose you observe that a particular stock, or group of stocks, is doing extremely well. You conclude that somebody has to be making a lot of money — so why not you? Why not jump on the bandwagon?

Here’s why not: The bandwagon may already be rolling downhill. By the time you and millions of other investors have read the latest articles on “today’s hot stocks,” those stocks may be losing momentum and cooling off.

Stocks simply do not stay “hot” for long periods of time. So, once you’ve identified a stock that has done extremely well for a while, it’s logical to assume that its performance may well flatten out — or even drop.

The lesson? Beware the greed factor. Buy a company because its long-term prospects are good, or because its management is innovative or because its products will be highly sought after for many years to come. But don’t buy it just because its stock price is currently soaring.

Now let’s turn to fear. If you’re already investing in a particular stock and its price is falling, you may fear losing money. So, to “cut your losses,” you sell your stock, or group of stocks, before the price can fall further.

History is full of examples of stocks — or whole sectors — that have done terribly one year, only to perform extremely well the next. If you let fear drive your investment decisions, you’ll rob yourself of the chance to participate in a rally that may be right around the corner.

Of course, there are many legitimate reasons to sell a stock. The company may have weak management or its products may have lost their competitive edge. Your own investment goals may have changed. But even if these things happen, and you really do want to sell a stock, try to do so when its price is up — not down. That may not be possible, but it’s a goal worth striving for.

You’ll notice that greed and fear are based on what has already happened to a particular stock, or to the market as a whole. But pay heed to these words: “Past performance is no indication of future results.” The Securities and Exchange Commission requires this statement to appear on every single prospectus. There’s a simple reason for this warning: Things change. A stock that did well (or poorly) in the past may now be operating in a radically different market environment.

Tax laws change; consumer preferences change; interest rates change — everything changes over time. Consequently, you must choose your investments based on facts, not on desires that greed and fear can produce.

Use your heart to connect to other people — but when it comes to investing, use your head.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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