Follow your heart, use your head, what does your gut say?  These are just some of the words of wisdom that people hear over time.  While these words and emotions may be great advice for love and other ventures they are usually the wrong advice for investing.

There are two emotions in investing – fear and greed.  These emotions often lead investors onto the wrong path.  It is these emotions that cause ‘flocking’ in investments which can and do lead to bubbles.  Greed leads investors to buy into ‘hot’ investments and sectors even when pricing and fundamentals do not support them, while it is fear that leads investors to often sell at or near bottoms or go too conservative when opportunities are prevalent.

The simple investment wisdom of buy low and sell high unfortunately is contrary to human emotion and because of fear and greed, many investors do the opposite.  There are many ways to take the ‘emotion’ out of investing.  Using a structured approach to buying and selling investments, investing at the proper risk level, not trying to time the market, using fundamental analysis all can help take the emotion out of investing.  One of the best methods to take the emotion out of investing is using a periodic rebalancing and repositioning in your portfolio.

Repositioning is simply selling one investment for another investment.  This can be done because the original investment is no longer performing well, the manager(s) left (in the case of mutual funds), the investment approach of the fund changed or many other reasons.  Make sure that the reasons why you purchased your initial investment still hold true.

Rebalancing is a very often overlooked tool and one of the best methods to take the emotion out of investing and sell high and buy low.  Simply put, your investments will act (or at least should) differently over different periods of time.  While some investments do well, others may not do as well or even struggle (this is not a simple sign to reposition the underperforming asset – remember to compare this to the appropriate peer group).  What rebalancing would say is to sell some of the better performing asset and purchase some of the lower investment.  As an example, suppose one has just 2 investments equally weighted at 50% each.  Because investment A does much better than investment B, the weightings become skewed and investment A becomes 70% of your portfolio.  Rebalancing would say sell some of Investment A to bring it back down to 50% and place the proceeds in investment B.  As the markets cycle, investment B may perform better, but through your action of rebalancing, you sold some of the Investment A shares high and bought investment B lower, thus setting your portfolio up to not only avoid a big drop (if investment A falls), but also experience an uptrend (if investment B starts to do better).  Decide how far you will let your investment deviate and follow this course of action (take the emotion out of the investments).

Securities and products offered through Papalia Securities, Inc.  Member FINRA / SIPC

NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE – NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations.  To determine which investment(s) are right for you, consult your financial advisor before investing.

Investment Notes:
From Ken Ferrone, Vice President, First Savings Financial Services

The measurement or fraction of one-half gets talked about in many different ways.  A glass ½ full or empty of course brings images of a person who is either an optimist or a pessimist.  Certainly growing up getting ½ the questions right on a test would produce a grade of 50%, or an F, which is not something any student should strive for or be proud of.

Within the investment world a ½ decision can be a very costly mistake.  When one purchases an investment (whether it be a stock, bond, mutual fund, or any other type of security or commodity), they MUST keep in mind that they have only fulfilled ½ of their responsibility.  The other half of their responsibility is the SELL decision.  In a lot of cases this Sell decision can actually be more important than their initial buy decision.

After purchasing an investment (lets say 100 shares of an individual stock), the investor must decide at what price is that stock fully valued (monitoring the fundamentals and earnings, etc. of the company will not be discussed at this time, although this definitely needs to be factored into the equation to have the most updated picture and price target).  The investor must decide at what price(s) they will either sell their full investment or a piece of their investment.

In an example, to watch a stock earn 100% and subsequently lose 60% means a 20% loss from their initial investment (assuming no sales along the way).  On the other hand a person who sells ½ their position after making 100% can then look at the 60% drop as an opportunity to possibly more than double their shares (assuming they still like the fundamentals of the stock).  Even if the stock never corrects by that 60%, the sell decision still means that the investor is ‘playing with house money’ and has nothing to lose (so to say).  Think of all the people who invested in Enron or Lehman Brothers (to name just two) and never sold any shares as they went up and up!

By no means are we advocating short-term trading and getting in and out of positions quickly (remember this is market timing and studies show you must be correct over 80% of the time to break even).  However, we are advocating monitoring your price target for your investment (adjust as necessary), and sell all or a part of the investment over time.  This will be a form of rebalancing (sell high) that will allow you to purchase another investment (buy low).

Keep in mind any investment purchased or sold should also be looked at in view of each investor’s asset allocation strategy and their personal risk tolerance.

Securities and products offered through First Savings Securities, Inc.  Member FINRA / SIPC

NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE – NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations.  To determine which investment(s) are right for you, consult your financial advisor before investing.