Jay Brooks
Q: I sold all my stocks early last year as the market was close to its lowest point. Now I am regretting this move because I realize that I made a poor short-term decision due to my nervousness. Should I invest this cash in the stock market now?
A: Too often, individual investors allow their emotions to drive their financial decisions, and this seems to be what happened with your investment changes last year. The past 12 to 24 months have been particularly difficult because fear in the investment markets reached a phenomenal level for some good reasons. Investor psychology plays a very important role in the investment process, and few investors are able to completely separate their emotions from their investment portfolio.
Market timing, which involves picking the best points to enter or exit the stock market, is nearly impossible for even the best investment minds. Many try to time the market, however, very few have any success over short or long periods. That said, I am not confident that now is the best time to return all of your cash to the stock market, but nobody is that smart. I do recommend that you take this opportunity to determine the appropriate amount of your investment portfolio to be allocated to stocks – in light of your age, time horizon, risk tolerance, income requirements, etc. Once the portion to be invested in stocks has been determined, begin the process of reinvesting your cash. If you are concerned by the short-term risks to the market, then consider investing over a number of months.
Most investors struggle with nervousness over time as new information and varying analyses flow across their desk. Patience and discipline in the investment process will generally pay dividends to investors who utilize them. Try to anticipate problems as you invest and avoid the assumption that the environment will remain bleak or rosy forever. It is important that investors understand their individual tolerance for risk with their investments. You should attempt to have a long-term investment plan that reflects your willingness to incur risk over time.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Jay Brooks is managing director of Brooks, Moore & Associates Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.