Becoming Emotionally Attached to a Stock Could Wind Up Costing You a Bundle
By Anthony Rhodes
There is a particular company out of Redmond,
Washington that I happen to be quite fond of. Their software products were not
only instrumental in aiding me during the formation and development of my
business, but the scope and range of their goods continue to allow me to
perform a great number of tasks, which I would otherwise have to outsource and
pay a hefty premium for, as well. So,
naturally when I hear their company slogan, there is a sense of resonance that
I have which transcends my usual affiliations with other brands. Yet, as I
perform my normal duties of evaluating stocks to see which ones merit my
clients’ investment dollars, these circumstances do not ever become a part of
the equation. The corporation’s financials are scrutinized just as diligently
as any others are, and the events, which encompass my appreciation for the
company, are immediately forgotten and stored away for later reflection.
Such non-biased thinking is the difference between
winning and losing in the stock market, and is in fact our topic of discussion
for this week. Amazingly, some investors have a tendency to purchase or hold on
to certain stocks for reasons unrelated to their intrinsic value! Although
this action may be overcome by individuals with deep pockets, for working class
folks, a mistake of this magnitude could have disastrous consequences.
Mis-Match
I can still recall the cries of former Enron
employees during the aftermath of the behemoth energy giants’ befalling. The
corporation’s perceived generous, and now infamous employer matching stock
ownership plan, was supposed to provide them with an unquestioned opportunity
to take advantage of its seemingly unstoppable growth potential. But in
reality, it became yet another example of just what can happen when you blindly
place your faith in any one company…even one that you work for. Investors ought
to keep this story in mind, and remain steadfastly cautious when participating
in employee stock ownership plans. While employers may tempt you with various
incentives to add ever-increasing amounts of company stock to your portfolio,
remember that diversification is the key to long-term investment success. I’m
not implying that there’s anything wrong with showing loyalty to the company in
which you work for by participating in these plans, but as with anything else,
moderation remains the rule of the day.
Inheritance Hesitance
Easily, the most difficult of these situations
involve the handling of a stock inherited due to the passing of a loved one.
That’s because these companies may represent our last real connection to the
individual, and somehow holding on to “their” stock seems like the right thing
to do, regardless of what it’s actually worth monetarily. Even more troubling
in this dilemma, is when the stocks being inherited, represent the companies in
which the individual worked for during their lifetime. After so many years of
commitment, would it be right to sell these stocks when they begin to lose
value? To address this situation appropriately, ask yourself why the individual
got into the stock market in the first place. Was it to own companies just for
the sake of doing so, or was it to make money? Equally as important is your
arrival to the conclusion that you are now the rightful owner of those
investments, and as such, must now make decisions based on that realization.
Perhaps the individual left the securities under your stewardship because he or
she remained confident that the portfolio would prosper under your management.
Assuming this to be the case, do you honor their decision by holding on to an
underperforming stock?
Human beings are emotional creatures, and as such,
are prone to make emotional decisions. While there are situations where
this fact can prove beneficial and even rewarding, the particulars, which
govern the handling of our investments, are not amongst them. You would be hard
pressed to find a greater manifestation of this truth than the stock market. In
this environment, success is often determined by how swiftly one can process
information, and convert it into deciding whether or not to buy or sell a
particular stock. With these rules being so clearly defined, emotional
involvement is a luxury which one can ill afford.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The
Planning Perspective www.theplanningperspective.com )
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