Be Wary of False Rallies and Emotional Investing

Well, today was a better day in the stock market! Most of my own personal holdings were up today – it was nice seeing all the green as opposed to the red that it seems like I have been looking at over the past couple of weeks. As I was looking at the stock prices for my holdings I caught myself and the feelings I had at that time. I felt happier and more confident that I had been in the past few days – I actually thought of deploying some of my cash and scooping up some bargains. This was before I actually thought about – I was basing this split second decision on emotion as opposed to fact. As we all know, that is when accidents and mistakes happen.

When you really think about the market action we have seen and look at it in comparison to what we have seen in previous rapid declines, the facts show that things have not been as dramatic as they could have been. Take this comment from Michael Sivy over at Money.com:

How bad are things? It’s hard to say and sometimes even the lenders themselves don’t know. There are a few things we do know, however. The decline hasn’t been as sharp as it was during the 1987 Crash. The damage to financial stocks isn’t as bad as it was in 1990, when the magnitude of the Savings and Loan Crisis became evident. And the market decline hasn’t been as broad as the bear market of 2000-2002

Things are not as bad as they could have been. What that tells me is that perhaps the worst is yet to come and days like today are dangerous because they provide investors with false hopes and bring out the emotional investing quotient. So what is an investor to do. In my opinion, the most important thing is to ensure you are not acting on emotion but rather on facts and a clear head. Consider your dividend growth strategy that it is long term focused and there is no need to act quickly. In terms of the second most important thing, I will leave that to Michael Sivy to explain, as he writes it more clearly than I ever could:

In a credit crunch, cash is king. People with uninvested money and those who regularly put away part of their salary will have plenty of opportunities to take advantage of opportunities – both in the stock market and the real estate market – as they become available.

There’s one important caveat, though. Don’t rush to snatch bargains the minute you see them developing. Once a major market decline begins, it often continues for more than six months. And stock prices can remain relatively flat for months longer.

Now is the time to be planning the optimum diversification for your long-term investments and developing the buy list that will reposition your portfolio the way you want it. Then follow the stocks on your buy list but move slowly in adding them to your holdings.