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Investing Psychology

For the astute, stock investing always having opportunities to buy investments (stocks, bonds, commodities, mutual funds, etc.) before the crowd finds out and its already over-valued or to buy a so-called blue chip temporarily out of favor, at a depressed price.

In many instances, the differences between great rewards and huge losses are subtle. However, before you can embark a new or jump back into the game you must ask yourself several questions wrapped into one.

They can be lonely questions because only you can answer them. It involves not only how much money you feel comfortable in stock investing but it also takes into account the level of risk you are comfortable with.

First, does your financial condition permit you to invest in stock investing,

Second, can you assume the current risk implicit in the stock investing and

Third, is the stock investing a safe place for you to be. Lets take them one at a time.

Your Financial Position

One point should be made clear at the outset:

you dont have to be wealthy to invest. In the past, insiders have trumped the belief that stock ownership is a rich mans game but with approximately 50% of american households currently in the stock trading that is no longer the case.

The goals of the small investor is not of enlarging their fortune because clearly they currently dont have one but to make available some money, however small, for the purpose of growing it over time.

Regardless of your income level, investment is possible if three conditions are met:

1. If you are relatively assured of a steady income. Of course, these days nothing is set in stone.

2. If you are meeting your current household expenses and obligations.

3. If you have cash reserves with which to meet unforeseen emergencies. You have to decide how much but I would suggest enough to cover 3 months of living expenses.

Of course, these conditions are simply safeguards due to the inescapable fact that stock prices fluctuate and that your judgment of when to buy, when to sell and how long to hold should never be dictated by outside circumstances. Investment should be undertaken only with funds you can honestly and legitimately earmarked as discretionary.

A reserve also enables you to pick and choose. Whether you have a few hundred or a few thousand lying around should not automatically mean that its time to invest it. Whats the hurry? As the professionals say, The stock investing market is always there. If the trend isnt to your liking or prices are over-valued a reserve allows you the luxury of waiting for more favorable conditions.

Finally, a reserve permits investment over a period of time rather than all at once. Some experts feel you should back what seems to be a good situation with all the investment funds at your command. Others will warn against greed and advise partial investment to spread the risk.

This article is not the place to discuss the merits of either philosphy. The point is to give yourself the flexibility of moving whatever way your judgment dictates.

Your Personal Situation

Your age, health, the number of dependents you support, the kind of job you have, or the type of goals you have set for yourself are just a few of the possible factors that will weigh into your investment decisions. Unfortunately, there is no rule, no prescription, no secret formula to follow.

The story is told of two salesmen who met at the airport.

Their conversation went something like this:

Hows business? asked the first. Oh, very good, said the second, and yours? Fine, fine, said the first. I got orders for a thousand gross last week. I sell buttons. Really, said the second. Ive had one order in the last three years. and you call that good? said the first. Actually yes, said the second, I sell suspension bridges.

Like the salesmen, the investor must have a clear notion of his goals and expectations and they must realize what is normal and acceptable to someone else might not be what is normal or acceptable to them.

What Kind of Person You Are

Consideration of your investment goals brings up the final point of personal evaluation - You. Very simply because your goals are a reflection of your temperament and personality.

You must go beyond your goals and pin down the traits and characteristics they stem from. Are your goals realistic? How do you regard money? How do you handle it? Are you easy-come, easy-go or do you count pennies? Are decisions involving money difficult for you to make? Are you on top of your budget or always running to keep up?

These are generalized questions and there are no absolute answers. Speculators should stay out of the stock investing market, but on the other hand, being a tight-wad is no virtue either. An overly cautious or conservative temperament may not be well-suited to react to the ever changing stock market trading conditions and thus miss out on opportunities to sell or buy.

The value in knowing thyself and how you will likely respond in a variety of financial situations is vital. Any personality type can count profits but it requires a certain rigor, a certain fortitude to face up to the adverse situations that investing unveils. If you have a character flaw, losing money will quickly expose it.

In a now famous pronouncement, the elder Morgan stared at a questioner who wanted to know what stock prices would do and he said, They will fluctuate. The statement is as pertinent today as it was then. As a result, the question you must ask becomes, How will I respond when they do? If you Know Thyself youll have the answer.