Emotional Mistakes

I've been asked for advice recently regarding what I think about the current state of the stock market. It's recent declines has impacted the marketplace and reitterated the key differences between those who should participate in the stock markets and those who should give it a second thought.



Participating in the stock market, if you don't know what you are doing, is the riskiest type of investment vehicle you can get into. However, with that high level of risk comes a high level of reward. As a participant in this game, you have to first understand that risk and build a portfolio using only investible assets meaning, ONLY USE MONEY YOU CAN AFFORD TO LOOSE! This is the point where most people make their mistakes and end up in financial distress. Know what you are doing, and don't let the "greed glands" grow.



Also, understand that the markets will always have dips and slides. A healthy market, like a good stock or index will have to have some sort of upward and downward movements every now and then. Without these changes, there would be no movement in the market and thus no profits to be made. As the old adage goes, "What goes up, must come down." The problem that the average investor doesn't understand is when a stock price goes down, it doesn't mean it is a bad thing, nor does it mean you lost money. It just implies you've lost some earnings in the short term, and possibly missed an opportunity to make some profits.



The common mistake:

In the stock markets, a loss is only incurred if you sell your stock when the price drops below your buy price. Meaning, if you buy a stock at $5/share today and the stock drops to $3/share tomorrow and you sell, then you lost $2/share.



What professional investors know is inevitibley the market will correct itself and the price will go up again. Professional investors know not to let their emotions take over, not to give into fear of loss, and most of all, NOT to take a LOSS! Another classic adage, "You don't invest to buy high and sell low."



The moral of the story: There is no space for emotions in the open market. Investing isn't personal, it is business. And most importantly, only invest what you are willing or able to lose.