I Almost Made an Emotional Investing Decision

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emotional investing decisionToday I’m sharing a story with you that will hopefully save you a ton of money over your lifetime. I almost made an emotional investing decision…

The Recent Market Downturn

On October 17th, 2012 the Dow Jones Industrial Average (DJIA) was at 13,557. Since then the DJIA and stock market in general has been on a downward slope. After the Presidential election stocks began to sell off even faster and on November 15th, 2012 the DJIA was at 12,542 or down 1,015 points (about 7.5%) in a little less than a month.

Normally I do pay attention to the stock market a few times a week just to have an idea of what is going on. It had never affected my investing decisions until mid-November. The following is why it almost affected my investing decisions.

My Investing Situation

When I bought my current car in 2010 I could write a check to pay for it but I took out a loan instead. Instead of not saving for a car, I decided to continue making a “car payment” to an investment account each paycheck that was invested in the Vanguard Balanced Index Fund (VBINX).

VBINX is comprised of 60% stocks and 40% bonds which I thought was an acceptable amount of risk (if not conservative) for the time frame that I’d likely be looking to buy my next car. I am hoping it won’t be until my current car is 10+ years old.

So What Changed?

I mentioned in an analysis of our debt pay down strategy that my girlfriend has a large amount of student loans. We’ve been trying to figure out how to get these paid off as fast as possible. Originally I didn’t even think about touching my new car money. Then I realized that even if we used it all to help toward paying off my girlfriend’s student loans we would still have plenty of time to save for new vehicles before ours should be retired.

Now that I had decided on a new use for this money I needed to analyze the risk I was taking with it for a new shorter time period. I expect to use this money when we get married in the next year or two as a big payment toward the loans. This short time period began making me feel uncomfortable with my current investment choice. I knew I now wanted to go into a more conservative investment.

Re-Enter the Recent Market Downturn

Now that I knew I needed to be in a more conservative investment I need to sell my current investments. I didn’t want to sell all at one time but instead in small pieces so I don’t lock in a big loss if I happen to sell at a bottom. However, as I slowly watched the market drop further and further over the last month I began to panic and wonder if I should just sell it all and lock in the current gain I had.

I almost did it. I almost made an emotional investing decision based on fear. Fear normally means lost money when it comes to investing and I would have locked in the losses of the last month if I had given in to my fear. Then I remembered that I didn’t have to put this money toward the loans immediately. Even if I lost everything it wouldn’t be the end of the world. It would just delay the loans being paid off by a few more months. This made me feel better and realize that there is no need to panic.

My Plan Going Forward

Going forward, I still plan to sell my investment in VBINX and move into a more conservative investment. Now, instead of freaking out like I considered, I’ll come up with a solid plan and stick to it. No panic selling here which hopefully means more money to pay the loans off in the future.

What would you do if you were in my situation? What percentage of the investment would you take out of the game in each sale? How often would you make each sale?

P.S. Since I wrote this post a little over a week ago the stock market has regained the losses that occurred after the Presidential election… really good thing I didn’t freak out!

photo by: wsilver

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I can’t really help you on this one, as I only ever invest using fundamental analysis and charting/trading rules.
    I stick to these rules religiously and the majority of the time they work out well for me, delivering small yet consistent profits and protecting my capital when things move in the wrong direction.

    If I was you and I had lost more than 10% I would have triggered a stop loss order thereby taking any emotion out of the equation.

  2. I think the reason that you got freaked out is because your investment choice was made based on the fact that you thought you wouldn’t need the money for 10 years.
    But then you changed your mind and said you’d use that money for a nearer term goal after you got married. This should have triggered a re-evaluation of your investment choice as needing the money in two years would generally require less risk, and perhaps something like a CD would have been the better choice.

  3. I am somewhat with Glen on this one as I am more of a fundamental investor.

    I find that when I give in to emotional investing I usually end up making a mistake. I did that a few months back with an Apple option. I had already made a decent profit, but got scared about losing it. I ended up losing out on another $1000.

  4. It’s hard to not become emotionally involved when you’re investing or making financial decisions of this nature. It’s tough for people to lose money, especially if you’re not investing with a long-term mentality. I’m glad you didn’t jump ship though; you’d have lost quite a bit of money! LOL. Too bad you didn’t sell the day of the election and buy back in on that Wednesday. :)

  5. Good work! When you see executive trades in public companies you usually know when they’re working with a pro because they’re doing what you are: slowly getting out at a consistent interval in equal installments regardless of market conditions.

    I love seeing the execs who are doing it themselves more, though: lots of emotional buys/sells. Those are companies I try to avoid!

  6. I almost dropped a grand in a penny stock (Blockbuster) when it was taking off. Luckily, I listened to sound advice (“what are you stupid, don’t buy that!”) and kept my cash. The stock froze and then dumped and everyone lost a TON of money.

    Money is very emotional, but when investing , it’s best to use your logical brain, and not your emotional brain. Nice work on not diving in and keeping your cool.

  7. I have to agree with the others. I try my best to not allow emotion into investing. It hasn’t been easy but it has been necessary. I find that when I allow emotions into most decisions, I end up making the wrong one.

  8. You’re always going to have emotional reactions/challenges like this. That’s why planning is so important. Develop a plan of action, and stick to it – just be sure your plan includes contingencies like sudden market drops.

    As for your current situation, why not let your money ride and sell it in chunks as the market rebounds? It sounds as though this new shortened term is more emotional than factual – i.e. you would like to use the money to pay off your GF’s loans, but do they need to be paid off right now?

    • No they don’t need to be paid back right now. I will be selling it in chunks over a short time period (a few months maybe?) and hopefully the market comes back as I sell.

  9. It usually takes a couple of these to show you how volatile the stock market can be. It sucks that you can’t get more than a 2% guaranteed return right now, but the stock market is not the answer for short-mid term investing. Just too volatile.

  10. This is one of the hardest parts about investing. I know how you feel. Back in March I bought Eaton Corp ETN at $50 per share and watched it go to the high $30’s. I was pretty disappointed with my big loss, but still happy to get the 3% dividend payment. Holding strong, it came back to $50. But I was getting a little scared …

  11. It was a good decision to wait. I think emotion always plays a bit of whatever we do, and it’s hard not to listen to it at times. I can understand you wanting the loans gone and finding a way to make that happen.

  12. I watched the Dow Jones with interest and it has recovered. Clearly the markets were looking for a Republican victory and they were the ones in panic when Obama was returned. Good that you didn’t join them!

  13. Emotional investing will almost always cost you, I wrote an article in early February on emotional investing and why to avoid it. I also posted an article yesterday on the stop loss, which is a nice way to take the emotion out of a sell decision. I’m torn on which one to reference in comment luv! :)

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