By Brandon Trout
Recently, we’ve seen an increased interest in mindfulness, although the concept is thousands of years old. Essentially, being mindful means you are living in the present, highly conscious of your thoughts and feelings. However, being mindful doesn’t mean acting on those thoughts and feelings – it’s just the opposite. With mindfulness, your decision-making is based on cognitive skills and a rational perspective, rather than emotions. As such, mindfulness can be valuable as you make investment decisions.
Two of the most common emotions or tendencies associated with investing are fear and greed. Let’s see how they can affect investors’ behavior.
•When investors are fearful: Investors’ biggest fear is losing money. So, how did many of them respond during the steep market decline from late 2007 to early 2009? They began selling off their stocks and stock-based mutual funds and fled for “safer” investments, such as Treasury bills and certificates of deposit. But mindful investors saw a great buying opportunity. They recognized the chance to buy quality investments at bargain prices. And they were rewarded because 10 years after the market bottomed out it had risen about 300 percent.
•When investors are greedy: We only have to go back a few years before the 2007-09 bear market to see a classic example of greed. From 1995 to early 2000, investors chased after almost any company that had “dot com” in its name. The rising stock prices of those companies led more investors to buy shares, causing a greed-driven vicious circle – more demand led to higher prices, which led to more demand. But the bubble burst in March 2000, and by October 2002, the technology-dominated Nasdaq stock index had fallen more than 75%. And since some of those companies not only lost value, but went out of business, many investors never recouped their investments.
To avoid these dangers, take these steps:
•Know your investments: Make sure you understand what you’re investing in. Know the fundamentals, such as the quality of the product or service, the skill of the management team, the state of the industry, whether the stock is priced fairly or overvalued, and so on. •Rebalance when necessary: If you’ve decided your portfolio should contain certain percentages of stocks, bonds and other vehicles, stick to those percentages and rebalance when necessary.
•Keep investing: Ups and downs are normal when investing. By continuing to invest over time, rather than stopping and starting, you can reduce the effects of volatility.
It’s not always easy to be a mindful investor and to avoid letting emotions drive your decisions – but it’s worth the effort.
Brandon Trout is a local Edward Jones advisor. He writes a monthly investment column for this newspaper.