“Every gambler knows that the secret to survivin’ …
Is knowin’ what to throw away … and knowin’ what to keep …” from “The Gambler” as performed by Kenny Rogers
Investors are human. They are influenced by what they hear and read in electronic media and print. They react to geopolitical events and social upheaval. They listen to multiple interpretative comments regarding market movements, read various websites, and follow stock prices as they descend and rise.
But allowing yourself to be overly influenced by a stock going up or down a percent or two just before you buy or sell is somewhat akin to listening to audience screeching on “The Price is Right.” You become the contestant looking to the crowd for assistance.
As you know if you’ve ever watched the show (and who hasn’t?), folks “Come on down!” the aisle and attempt to guess the price of different products. The treadmill, hot tub or sailboat is presented on stage and the contestants almost invariably turn to the audience and their friends for pricing help. That the contestants are so obviously influenced by the shouting from the crowd is a fascinating dynamic.
Here’s where the “follow the crowd” mentality relates to investing. If you have a very good idea of what a business (or stock) is worth, what does it matter what someone whom you’ve never met thinks of it? Astute investors must trust their own judgment. When the price of a security you are considering for purchase or sale goes up or down slightly just prior to your buy or sell, it’s often essentially “noise from the audience.”
Now, sometimes there’s a valid reason that a security is dramatically rising or dropping in price that you should ponder before buying or selling. And as always, you should consider your age, your financial goals, your time horizon and your risk tolerance before adding or subtracting from your portfolio. That said, far too many of us are BDIST, or Bogged Down in Stock Tickers. Market goes up, we buy more. Market goes down, we get nervous and sell. Neither is a long term, sustainable investment strategy.
Why? Well, if you buy after a security has appreciated considerably in price, you may have missed the price appreciation curve. The stock may have already risen in price about as much as it’s going to. And if you sell when a security’s value descends, many times you are simply locking in further losses. Experienced investors know that often the time to buy solid companies is when they hit a price slump. This is a PBO, or Prime Buying Opportunity.
Most investors and advisors trade while markets are open, but many also do so with a plan that ignores the noise of the day.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.