How to Help Control Your Emotions and Make Better Investment Decisions
How many times have you come home from work, turned on the evening news and seen that the stock market had a 300 point move that day? How did that make you feel? If it was a 300 point move to the upside, you were most likely ecstatic, since that meant your 401(k) made money. Was it a 300 point move to the downside instead? In that case you probably felt anxious and began worrying about how much money your 401(k) lost.
As the markets (and market participation) have grown in recent years, these types of one-day price moves have become more and more common. Even though these big daily “swings” are occurring more often, most individual investors still have trouble handling the emotions associated with those swings. You find yourself euphoric on the big up days, thinking that the markets are going to the moon! You find yourself despondent on the big down days, quite certain the bottom is about to fall out of the markets. This is understandable because you are human and human emotions are sometimes hard to control, especially when it comes to your hard-earned dollars.
Fear and greed can undermine even the best laid investing plans, so how do you get a grip on them? One good way is to use price charts to find market “reference points.” Keeping an eye on a price chart for the Dow, or any market, can provide you with quite a few helpful reference points:
- what are the recent highs for the market
- what are the recent lows for the market
- is the market trending up or trending down
When you have some idea where the market has been trading recently, you can put the big daily moves in perspective. They cease to be the stand-alone numbers that toy with our investment emotions. For example, perhaps you see this evening that the Dow dropped 250 points for the day. If you had periodically been watching a price chart of the Dow, you would have known it had been on a torrid advance of almost 1,000 points in the past couple of weeks. Today’s 250 point drop did not upset you because you had the reference point of recent market action to put today’s move into context.
You can find reference points on charts of individual stocks and mutual funds as well. Suppose you get a “hot stock tip” from your brother-in-law’s next-door neighbor. You notice the next day that the stock is up a couple of dollars. The emotional reaction is, “I’ve got to get into that stock right now!” The unemotional reaction would be to look at that stock’s price chart and try to find some reference points. Looking at the chart you discover that even though the stock has gone up three or four dollars this week, it had been dropping like a rock over the past two months, losing almost fifty dollars a share along the way! The three dollar “pop” does not look quite as exciting when put into that context.
It makes no difference whether the subject is a hitting streak in baseball or a winning streak in the market: a stand-alone number means nothing. Until stand-alone numbers are put into context with some previous reference points, it is nearly impossible to understand how impressive, or unimpressive, those numbers may be. Price charts can provide a quick and easy way to find market reference points and thereby help to ease the emotions of those 300 point market moves. The really nice thing is that you do not have to be a stock market expert to use them. In fact, you only need to look at them occasionally to keep track of how the markets are moving.
Price charts can be a big part of your overall long term investment plans. Learning to read and understand them is not difficult and well worth the time devoted. Our educational website, hardhatinvestments.com, is designed to help beginners “get their feet wet” with the very basics of chart reading and trend following investment methods. Give your nerves a break and become a more confident investor by learning to use price charts to find your market reference points.
