As prices dip, use your brain… not your gut

Here is an interesting point I read in the New York Times today about the psychology behind housing speculation:

“Rising prices encourage investors to expect more price increases, and their optimism feeds back into even more increases, again and again in a vicious circle. As the boom continues, there is less fear of borrowing heavily, or of lending heavily. In this situation, lower lending standards seem perfectly appropriate — and even a fair way to permit everyone to prosper.”

Earlier this year, I started investing in my company’s stock purchase plan. Since last November, the stock declined almost 40%. During this time, people were telling me to stop buying because my stock was losing value. However, I increased my contribution to the plan. Why did I do this? I have confidence that the stock will be back up. I am taking advantage of an under-valued asset.

After checking my portfolio yesterday, I am down about 5%. However, short-term returns mean little to me. In a couple of year, I think that I am going to be very happy with my investment.

That said, I somewhat understand a person’s gut reaction to selling as prices go down. People are worried that they will never be able to recoup their money unless they sell immediately. But IMHO, people need to maintain a long-term view in order to be successful investors… or at least to avoid a stroke before you turn 40.

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