Federico Tessore – Investor Passport (ARG) –
One of the many sayings about the market goes: “A bull market covers a multitude of sins.”
With US stocks at record highs, it’s essential you are keep a cool head when making any kind of investment decision. As we’ve mentioned many times before, emotions can be your worst enemy when it comes to money and stocks, especially at times we see big swings in the market. Let me explain how our psychology has the potential to skew our thinking about the market:
1. Don’t loose sight of the purchase price
The Dow Jones Industrial has risen 7%, the S&P 500 is up 5%, and the NASDAQ has gone up 4% since the presidential election in November. A lot of other American market indexes have also gone up. It appears everyone is throwing money at the market and counting their kitchens before they hatch.
But we shouldn’t get ahead of ourselves. It’s important to emphasize that before the November 8th elections share prices were low, which guaranteed higher returns. But the situation has changed now: at the moment, market indexes are at historical highs. And you have to keep in mind that stock price functions as indication of a company’s future earnings. As Warren Buffett said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
2. Don’t get greedy
You may be thinking that you don’t have enough stocks in your portfolio so you should add more. But why do you think you have to add more? The best time to think about adding to your portfolio is always right before there’s significant movement in the market. You may be thinking you need to buy more stock when you should be thinking about rebalancing your portfolio instead. Don’t let greed color your thinking. That’s the kind of thinking that will lead you to buy high and sell low, trapping you in a vicious circle.