Controlling the Fear Factor

By Diahann Lassus
CFP^®, CPA, Lassus Wherley & Associates, P.C.

Mar 6, 2001 11:12 AM

You know that feeling you get when you watch the market going down or you review your investments after a really bad couple of months or after a really bad year. You know that sinking feeling in the pit of your stomach and that "why me?" reaction. I can think of a few periods that qualify including 2000 and even year to date in 2001.

You look at it and normally have one of two types of reactions. The first type of reaction is one of denial. The tape in your head sounds like this "I can't deal with this so I am going to pretend it doesn't exist. If I don't acknowledge there is a problem maybe it will go away." So you take that statement and you file it away really quickly or maybe you don't even open it or you use that new shredder. Sound familiar?

Another possible reaction is I am going to sell everything I own because I just can't deal with this anymore. But you know if you sell everything today, the next great Bull Market will start tomorrow. The reality is that both of these reactions are normal. We all have a tendency to react emotionally to actions in the market. When the market rallies, we experience euphoria. When the market goes down, we experience that sick feeling in the pit of our stomach.

But you know that. The question is "how do you handle it?" Let's talk about a third choice. Here's the way it starts. As soon as one of those reactions starts to grab you, take a deep breath and repeat this mantra: I am a long-term investor ....... I am a long-term investor ....... I am a long-term investor.

Now that you have stopped hyperventilating, let's look at how to make sure your portfolio is really where it needs to be. Follow these steps to make sure you can make it through a really exciting and unpredictable market and actually sleep at night again.

Think about your overall goals and objectives. What are you trying to achieve with these dollars? Can you target a lower return and lower risk and still reach your objectives?
If you don't have a financial plan, here's a real good reason to develop one starting right now. Planning now means a lot less regrets later. Think about what a financial plan could mean to you and your family. You could eliminate some of that fear of the future by actually having an idea of what needs to happen.
Make sure you understand the basics of investment even if you hire a professional to help you manage your money. You need to understand the reasoning behind how your dollars are managed.
Review your overall asset allocation to make sure it is still in line with your original plan. If you are targeting 30% in bonds and 70% in stock, is this what you currently have?
Review each individual investment. If you own stock, is it still a good company? If you own a mutual fund, is it performing like comparable funds? If not, why not? Would you buy it today? Slow down and really think about the investments you currently own. Even if an investment has lost money, it is not necessarily a bad long-term investment. Don't just react to what is going on in the market.
Maintain that diversification. Don't let any investment take over your portfolio. Even if a stock or fund has done really well make sure you take profits and don't let it take over too much of the value of your portfolio.
Develop a list of investments you are concerned about. Review them again. If you are ready to sell it, focus on why. Ex: Cisco Stock has fallen over 50% since you purchased it. You have had enough and are ready to sell it. If it is still a good company, why sell it after a huge loss. If you believe the company will not recover, sell it. Not all companies or mutual funds are created equal.
Analyze your investments on a rational and logical basis. Walk through the pros and cons of owning your investment. Is it a strong company or fund? Is it expected to recover and do well over the next few years? Would you buy it today at the current prices for future investment?
Purchase new investments only after extensive analysis. That means don't buy the latest hot investment or buy something on a friend or neighbor's hot tip.
Focus on the investment value going forward and not just on past performance. Past performance is only one indicator, not necessarily a predictor of future performance.
Think about the basics of investing. You want to buy low and sell high not the other way around. Don't get caught selling something after it gets close to a bottom especially if you believe it is still a good company or good mutual fund.
If you aren't sure what to do or you find yourself unable to make a decision, hire someone to help you. There are many Certified Financial Planners tm out there that are capable of helping you work through some one these tough decisions. Don't be afraid to ask for assistance in a very difficult market.

Don't make the mistake of moving in and out of investments trying to find the "right answer" in a volatile market. Unless you have a crystal ball, a diversified portfolio is still the right answer to most investment questions. Remember that many investors lose money not because of bad investments but because of really rotten timing of selling investments in a down market. This happens because by the time they are convinced that the market is going down forever and actually sell, is right before the market does go up. This is kind of like being convinced that this time is different and the market will go up forever. Remember those conversations with your friends.

The key is to plan your investment program, select individual investments carefully and don't make changes without extensive analysis. And remember that mantra: I am a long-term investor ........ I am a long-term investor ....... I am a long-term investor.

Like any other market, this one will not last forever. Sooner or later the market will rally and we will once again get a chance to experience the euphoria part of the equation. Until then - keep that fear factor under wraps and don't let those emotions control your investment decisions.