Money Coach Discourages Emotional Investing From gas prices to mortgage meltdowns, an unstable economy may lead consumers to make poor investment choices. As a part of the Investment 101 series, Money Coach Alvin Hall explains how to keep your emotions separate from your finances.

Money Coach Discourages Emotional Investing

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Michel Martin, host:

More on money the spike in gas prices is frustrating all the more so when the stock market is on a roller coaster ride and you see your hard earned retirement money taking the express run to the basement. How to keep your cool, we thought we would ask Alvin Hall as part of our Investing 101 series, where we're going over the basics. Basic terms and principals like how to buy stocks and bonds.

Today though, Alvin is going to deal with something a bit more intangible. How to keep your emotions from getting the better of you, when the financial news is so bad or good for that matter. Alvin, welcome back.

Mr. ALVIN HALL (Money Coach, "Investing 101" Series): Thank you, glad to be here today.

MARTIN: Well, actually that is where I wanted to start do you think people make more money mistakes when the news is bad or when it's good?

Mr. HALL: They make mistakes in both directions, as the market is heading up people think the risk tolerance is greater. That's one of the effects you've seen in the housing market as the value of the houses went up. People said, I can take on more debt, I can handle this, the same mind-set affects the stock market. And so people start doing much more risky things on the upside. On the downside as soon as the market starts to go down, first they say to themselves well I can tolerate this, but then as it goes lower and lower that big word loss, real losses start to pile up and then they bail out. So, people make mistakes on both ends.

MARTIN: Well the thing that you've talked to us a lot about is inertia, people kind of...

Mr. HALL: Yes.

MARTIN: Don't do anything.

Mr. HALL: Yes.

MARTIN: The first thing I wanted to ask you is, you know, you open up your 401K statement and you just feel sick, you know, you think, you know, wait a minute.

Mr. HALL: Yes.

MARTIN: I think this happens to everybody whether you're just starting out, whether you just, you know you're feeling good about yourself and you put your first couple of hundred bucks away in this account. And you think yeah and then you open it up and there's less there than you started with. Or, even if you've been at it for a long time and you feel sick to your stomach. Is there something you recommend that people do first?

Mr. HALL: Yes, it's very important to try to take emotion out of certain decisions. And the thing you need to do is to set it into place a systematic investment plan. Especially if you are young or just started this will be your friend, this will keep you from making severe mistakes. A systematic investment plan is where you agree to put in the same amount of money at regular periods. There is one called dollar cost averaging the other one is known as the constant ratio, a constant dollar plan. In this case, you decide up front, I'm going to keep 60 percent of my money in stocks, 40 percent in bonds. And then periodically, once a quarter, once every six months I'm going to rebalance that.

So, if stocks have gone up and I've had a great run up in stocks, then I'll switch that money from risky investments to something safer like bonds. If we're in a situation the way we are today where stocks have gone down. Then you move some of that money from bonds which are much more conservative and hopefully are buying stocks when they are undervalued.

MARTIN: If you have individual stocks and I know this is not something you recommend for people who are...

Mr. HALL: Yes.

MARTIN: Novices, but if you do for whatever reason, have individual stocks, is there some strategy you should employ to decide when it's time to get out.

Mr. HALL: Yes, I think when you have individual stocks, you should definitely subscribe to one of the service either Standard and Poor's tear sheets or Value Line Investment Surveys to get an objective third party opinion about what they believe the future of that company to be. Once you have gathered that information then you should look at, at what point you think, I'm going to bail out of this stock, because it's hit a low point. And I think it's going to go lower and I want to bail out, but you can't look back with regrets. Because it's that look back that always undermines people's decision.

MARTIN: If you own mutual funds, I think most people are probably own stocks through a company sponsored 401K.

Mr. HALL: Yes.

MARTIN: Through an IRA or through a mutual fund which they purchase themselves. Is there some, you know standard one should employ when evaluating what to do there.

Mr. HALL: Well, not really because all of the mutual funds have different exit periods. Some of them will let you rebalance it once a quarter, some once every six months. So, even though the market is going up and down over that period of time, the mutual fund company itself or the 401K plan often will prohibit you from making those emotional decisions, at regular intervals. While that may be frustrating to some people, it really helps them to stay the course.

But that is one key point, I would like make for everybody. You should always have an exit strategy. When I lived through the last down-turn in 2000, when all the tech bubble burst, I decided that this time around I had a number in my head, that if the value of my portfolio hit that number, I would move it to cash, a part of it to cash. It did hit that number and I did that, since then there has been a rally, and then it's gone below where I sold out, I do not look back with regret. So, I think everybody needs to think at what point given your age you may want to get out of the market.

MARTIN: How do you know what that point is?

Mr. HALL: You need to ask yourself if it drops by 20 percent is that enough of my financial security being wiped out that I'm going to have sleepless nights. It's all the sleepless nights test. If this is all that's occupying my mind during day light hours, it's time to lighten up or if you can move to cash, sit on the sidelines, take a breather and get control of your emotions. Those sleepless nights are not good as you and I both know.

MARTIN: That's true, well and finally, when is the time to call somebody, like call for help. If most people are going to say if you own, if your main involvement in the stock market is to a company 401K, what do you do? Do you call your H.R manager is there somebody from the fund you should be able to call to get advice? Should you get an outside person to advise you of financial plan? When do you start calling?

Mr. HALL: This is a brilliant question, most of the 401K plans have administrators who are there to help you look at whether or not you should lighten up in some areas, change your mixers. For example, Fidelity when it participates in a 401K programs offer people this kind of services.

Also, I think it's always good to have outside person there. I think if you know someone who has good financial experience, who is someone who understands the market go to them, and it's like having a therapist. It's not that they're going to give you an answer, but they'll help you clarify how you feel and the strategy that you take that would be most appropriate to you, because there is no one-shot-size fit all answer, there just isn't.

MARTIN: All right, our money expert Alvin Hall joined from our New York bureau and I have 30 seconds to ask you what you want to talk about next week.

Mr. HALL: Next week, I think I want to talk about the commodities market. Everybody is looking at gold and silver and oil and they're saying maybe I should get into this. I think it's something that people need to be very careful about because it is highly risky and it's seductive.

MARTIN: All right, commodities next week. Alvin Hall thank you.

Mr. HALL: You're welcome.

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