Stock Market Risks: Change Your Thinking

Stock price of ABC Company:     today:            $  80

Stock price of ABC Company:     1 month ago  $ 100

Is there more risk today, at the lower price, or a month ago, at the higher price?

In today’s Sunday New York Times, a commentary began: “While market risk appear to be climbing – stocks have lost ground for six consecutive weeks as the economy seems to have hit another soft patch…”

Most investors get nervous and consider markets to be riskier when prices are falling.

However, from a risk standpoint, investors would be best to consider a reverse in their psychology or how they view stock prices.

When prices decline, there is actually less future risk, as the expected future return is greater.

When prices are rising, people feel more positive about stock prices and seem more willing to invest. This type of thinking leads to the opposite of what is in their best financial interest. It emotionally feels “best,” but leads to the opposite of a succinct investment philosophy:  buy low and sell high.

Part of the value of working with our firm (or other good financial advisors) is to discuss this type of emotional psychology, as it relates to investing and making financial decisions.

If you take a long-term perspective, and can view stock prices more similar to buying retail goods (want to buy something when it is on sale, not at regular retail prices), you will have a better investment experience.

Like many things in life, this may be easier said than done. It can be hard to buy stocks in a declining or turbulent market, but that decision can be very profitable in the long run.

Cite:  The Worry Meter May Overlook Some Warning Signs, New York Times, 6/12/11, Paul J. Lim

Note: This is my 9th post of the @projectdomino writer’s challenge.This a challenge for bloggers and writers to post for 30 consecutive days, beginning on May 31. I will receive a prompt, or idea, from them each day, which I may use as the basis for that day’s post. The above post is not based on today’s Domino prompt. For more information @projectdomino, see my post on May 31, 2011.

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