Investing based on fear is always wrong! Do not let emotions cloud your investing judgment. Instead create a investment plan when you are emotionally sober, and stick to it. Most other people are being driven by their emotions. The way to capitalize on this is to follow your plan.
Here are some examples of investing based on fear that were wrong:
1) 2008 Stock Market Crash - Better sell all my stocks! They lost 40% and I cant afford to lose any more! 2) 2008 Commodity Bubble - Better buy commodity/oil/energy stocks! All my regular stocks are losing money and these have huge gains! 3) 2007 Real Estate Bubble - Better buy that second investment property now before I cant afford it! 4) 1980s Gold Bubble - 20% Inflation OMG! Gold is going to $10k/ounce and the dollar is worthless! 5) 1970s/80s Long Term Treasury Pop - OMG I lost 60% in my LT treasury bonds! I better sell the 30 year treasury bonds I have now yielding 17% before I lose all that too!
Is gold in a bubble now? Only history can tell. The fact is that if gold wasn't part of your investment plan 3 years ago, then it shouldn't be now. Investment plans may be subject to change, but do not do so based on emotion. Do it only based on life situations such as having a child or death of a spouse. Do NOT invest based on fear!
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Actualy, you should consider your fear when making investment decisions - if you arent comfortable with a given option, you shouldnt risk any money on it.
The examples you note have nothing to do with fear or emotion, and everything to do with basing investment decisions on past performance rather than future potential.
i disagree...you have it completely backwards..investing based on OTHER PEOPLES fears is right. always invest opposite of the headlines. when gold is super high, you sell..when people are scared of the market (past year), you buy buy buy. everything's on sale. a favorite quote of mine: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. "
In early 2000, I was afraid of losing my money in the stock market because everybody was saying the sky was the limit, and valuations were high. So I sold my stock in a certain local maker of Pentiums (whose valuation had usually been slightly lower than the overall market's) and my shares in a small company growth fund and put the money into a small company value fund. How was that wrong?
germanpope said:fear is the greatest motivator, if you got out the market before the crash because you were afraid of imminent economic collapse you were spot on
What about those who have missed out on the 50% gains since March since they've also been to fearful to get back in? How is fear working out for them?
Although I don't really like TripleB using FWF as his blog, he does have a point - investing on the basis of your fear is generally a bad idea. Of course, as its been pointed out, buying when others are fear mongering (investing off the basis of fear from others) can work out well.
That doesn't mean you won't get a hit every now and then, but just like in real life fear can lead to stupid decisions. Although its probably a good idea to not walk down that alley in the dark (rational fear), its probably OK to buy that haunted house that is listed at half price on the market because someone got murdered in it (irrational fear). The problem is fear is an emotion, and people often can't distinguish between rational (ie: inflation) and irrational (ie: thinking the financial Apocalypse is at hand) fears when it comes to investing.
Message edited by: magika on 2009-11-01 12:23:09 CST
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