Investing

A friend of ours owns a small money-management company. He does just about everything -- picking the stocks, setting up the funds, the whole bit. He's a smart guy, and I like him, but I noticed years ago that he has this one flaw. He can easily imagine people putting money into the stock market. He can't easily imagine people taking money out. He likes to use phrases such as 'investing for the long haul', and by that, I think he means in the decades. The idea that you might want at some point to get that cash back into your own hands is virtually incomprehensible to him. Like the adolescents who can't imagine their parents having sex, and yet their very presence makes the point, he can't see why having money locked into a stock is inherently just a little scary. He's not dumb. He just can't see it.

Today, in the Washington Post business section, I read an article on Protecting Your Nest Egg from a Bear. It's about retirement savings, and what do you do when the market goes seriously south, as it's doing now. The answer is, just hang on. As your ten thousand dollars drops to eight, and to seven, and maybe to six -- just hang on. Believe that it will eventually come back. The phrase the author uses is 'locking in losses' -- if you own stocks that are down three thousand dollars in value, and you think they'll go lower, you may well think 'sell', congratulating yourself on getting out before you lose more. His view is that before, you just lost the money on paper -- now, you've lost it for real. That's a little hard to accept. Intellectually, I think, sure, I see that. Emotionally -- well, it'd be easier to handle if I had a lot more money than I do, or ever will. This isn't Monopoly money we're talking about, after all. This is mortgage and taxes and clothes and food -- if not now, then in ten or twenty years.

He also says that if you have a stock that's done really well, you should sell it. The idea there is that if the stock has done well, and you sell it, you're locking in the earnings. You don't have to look at that stock any more (and, I think, probably thats a good idea, as the stock you sold at 104 goes to 124). The thing is, you like the sensation of watching your stock go up, and selling it feels like getting off the rollercoaster right before the ride starts.

So either way, the stock market guides tell you to do what your gut says not to do. Keep the losers. Sell the winners. Except, of course, for the guides that say to sell the ones that don't meet your performance goals; keep the ones who do. Maybe.

Huh?