Keep emotions out of investing

We have the full range of emotions, and it's important to express them but not in the investment arena.

Emotions such as greed and fear can do serious damage to your investment plans. How? Let's look at greed first.

Contrary to what you may have seen depicted in movies about Wall Street, greed is not good. Suppose you observe that a particular stock, or group of stocks, is doing extremely well.

You conclude that somebody has to be making a lot of money so why not you? Why not jump on the bandwagon?

Here's why not: The bandwagon may already be going downhill. By the time you and millions of other investors have read all the articles on "today's hot stocks," these stocks may be losing momentum and cooling off. Stocks simply do not stay "hot" for long periods of time.

So, once you've identified a stock that's done extremely well for a while, it's logical to assume that its performance may well flatten out or even drop.

The lesson? Don't be greedy. Buy a company because its long-term prospects are good, or because its management is innovative, or because its products will be highly sought-after for many years to come. But don't buy it just because its stock price is currently soaring.

Now, let's turn to fear. If you're already investing in a particular stock, and its price is falling, you may fear losing money. So, to "cut your losses," you sell your stock, or group of stocks, before the price can fall further.

Yet, the market's history is full of examples of stocks or whole sectors that have done terribly one year, only to perform extremely well the next.

If you let fear drive your investment decisions, you'll rob yourself of the chance to participate in a rally that may be right around the corner.

Of course, there are many legitimate reasons to sell a stock. The company may have weak management, or its products may have lost their competitive edge. Your own investment goals may have changed.

But even if these things happen, and you really do want to sell a stock, try to do so when its price is up not down. That may not be possible, but it's a goal worth striving for.

You'll notice that greed and fear are based on what's already happened to a particular stock, or to the market as a whole. But pay heed to these words: "Past performance is no indication of future results."

The Securities and Exchange Commission requires this statement to appear on every single prospectus. There's a simple reason for this warning: Things change.

A stock that did well, or poorly, in the past may now be operating in a radically different market environment.

Consumer tastes change, regulations change, public policy changes everything changes over time.

Consequently, you simply can't choose a stock on the basis of emotions that are, in themselves, a response to what's gone before. Use your heart to connect to other people but use your mind to invest.

(Betty J. Neal, CFP, is an investment representative with Edward Jones in Springfield.)