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Financial | By Philip C. Henry
Philip C. Henry, ChFC, CFS is the
President of Henry Wealth
Management, LLC, an independent
financial planning firm located at
1370 Washington Pike, Bridgeville,
PA. He offers Securities and
Investment-Advisory Services through
a non-affiliated firm, NFP Securities,
Inc., a Broker/Dealer, Member
FINRA/SIPC, and Federally Registered
Investment Advisor. He may be
reached at 412-838-0200 or at
Phil@HenryWealth.com. The firm’s
website is www.Investor emotions are magnified by a microscopic view, HenryWealth.com
Do You See What I See?
Investor emotions are magnified by a microscopic view, while the telescope promotes a longer-term outlook
As a child, mom once told me that I needed more science to go
along with my passion for sports. To bolster that interest, I received a
microscope and a telescope for Christmas. I vividly remember
switching between trapping insects between two small panes of glass
for further microscopic inspection, and catching glimpses of the
moon through the telescope.
The question for investors is, with which apparatus do you view
your stock portfolio? Those preferring the microscope will concern
themselves with every short-term event, such as the recent sub-prime
mortgage crises, the price of oil, the Enron scandal, and so on.
Moreover, two emotions may tend to drive their behavior into a state
of reaction (and even over-reaction!).
Two Motivating Investor Emotions
Fear may induce investors to reduce or even eliminate their stock
holdings after the market tumbles. “Cut my losses,” is the mantra
of those caught in the “fear factor”. Listen carefully and you may hear
a mumble following the tumble: “I’ll get back in when things are
more stable.”
Usually that means re-entry into stocks after the market bottoms
out and is halfway back to a new high! Of course, the fear reflex is
based on a microscopic assessment, causing one to sell near the
bottom of a decline and, quite possibly, missing half of the upward
rebound.
Greed is the other motivating emotion. Its mantra is, “I want
more.” Though apparently contrary to fear, greed tends to produce
similar results. This is because, during a run up in stock prices, the
greedy investor may be tempted to move funds allocated for bonds
over to stocks. Greed may likewise induce an investor to move from
one segment of stocks into another (such as shifting small caps to
large caps). Greed can throw the notion of a well-diversified and
balanced investment strategy out the window, causing one to
concentrate on those asset classes that are presently outperforming
others, despite the fact that this may result in excessive risk and the
abandonment of historically sound investments. Thus, this micromanaged
move tends to buy near the top of an advance.
Opt for the Telescope
Now consider the wisdom of the investor who sets aside the
microscope in favor of the telescope. This person has a long-range
view. His or her good judgment creates more and more investor
confidence in the capital markets and promotes a buy and hold
strategy. Its discernment promotes allocation among many sub-asset
classes, and reminds one that there has always been, and will always
be, an investment “malaise du jour” ( problem of the day) to fret over.
Thus, we presently are not in uncharted waters.
The book of Ecclesiastes, chapter one and verse nine, reminds us:
“That which has been is that which will be, and that which has
been done is that which will be done. So there is nothing new under
the sun.”
This verse has certain application in the world of investment
management.
My advice: take a hammer to your investment microscope and
clean the lens on your investment telescope. As an aside, my
childhood microscope didn’t last long… my little brother broke it!
But alas, we are now best friends and business partners!
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendation. NFP Securities, Inc. does not provide legal or tax advice. Clients should consult with their own legal and tax advisors.
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