Wednesday, January 19, 2011

Advice: Reduce Angst Buying or Selling Stocks

Someone that I know invests in stocks, and he does really well.

However, he says that the stock market tends to drive him nuts.

He told me about a time that he heard something about a sudden event on the radio, and the first thing he thought to himself was, "I wonder how this will affect the price of XYZ stock."

The second thing he thought to himself is that he's going absolutely NUTS. The event had NOTHING to do with his stock. He was just THAT consumed with his stock.

He asked for some advice on how to avoid that emotionally fueled angst he gets every time he's in the stock market.

Here is what I wrote to him...........

I can provide as much or as little advice on investing as you want, but to me it seems pretty simple.

You mentioned that you feel anxious every time you look to buy or sell stock.

I can't promise that you'll never feel any angst, but here are a few guidelines that I follow:

1. Don't buy an investment UNLESS you are passionate about it. (I called off work for a half-day once. I turned $2500 into around $7500 because of it.)

2. If you own stock, and the stock is making you nuts, ask yourself the following questions.

Stock Price is Falling
a. Did you buy it for the right reasons?
b. Do those reasons still apply? If not, what changed?

Summary: If you bought it at the right price for the right reason--AND THOSE reasons still apply--sit tight. Buy more if you can. (It will lower your break-even price and bring you closer to breaking even.)

If you realize that your reasons are faulty, get out!
If your previous good reasons no longer apply, get out!

Stock Price Suddenly Rises
a. Can you make sense of why it rose as much as it did?
b. Would you buy the stock at today's price?

Summary: If your stock price suddenly rises, does it make sense? If so, enjoy the ride. If not, get out!

"Would you buy the stock at today's price?" is the best litmus test that I know. It also helps calm my nerves when the price becomes suddenly volatile.

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