There is a joke in the industry about the small investor. They have a tendency to buy high and sell low–exactly the opposite of what they should be doing.

Why would they do such a thing? In one word: Fear.

The small investor (yeah, that’s you and me) is often afraid that they are missing out on some big opportunity to make loads of money, so they buy stocks that are trending up. The problem with this is they do so right about the time the stock is hitting its ceiling.

Then, because they are afraid of losing money, they start to sell stocks as they are trending down–even though they may very well come back up and it could be a better decision to buy more at that point.

So what is the answer to this conundrum? I’m afraid it is easier said than done.

The key is to take emotions like fear out of the mix when you make decisions about investing. Instead, play like the big investors do and think only about your objective and whether or not it is realistic for the positions in your portfolio to reach your objective in the time frame you have set.

I know it is hard to see your stocks rise and fall aggressively, but I have watched people sell out of secure, long-standing companies at a loss just because the stock fell. One month later, had they stayed in, they would have been showing a profit.

My own great example of this is AIG. If I had sold AIG when they did their reverse split and went as low as $8.22 a share, then I wouldn’t own any right now at $35.75 a share.

This line of reasoning doesn’t mean buy and hold everything forever, because there can be some indicators that a company is going to declare bankruptcy and you could lose everything–might as well sell at a loss but get some value–but it does mean to look objectively at your portfolio instead of emotionally.

Later,

Yolander