Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Money Magazine Ask the Mole

Why you should be buying stocks now

You've just discovered that you're not as brave as you thought. Don't make it worse by acting on your fear.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By the Mole, Money Magazine's undercover financial planner

Have future topics for the Mole to address? E-mail him at themole@moneymail.com.

(Money Magazine) -- When new clients come to me, I ask them a few questions about risk. One is "What would you do if the value of your stocks fell by 50%?"

The vast majority answer that they would buy more stocks. So now that the market has lost about 40% of its value, why are some of these same clients clamoring to sell?

Risk tolerance ebbs and flows. From 2003 to 2007, U.S. stock prices nearly doubled and international shares nearly tripled.

During such good years, you tend to believe that you have a high tolerance for risk. At times like these, your willingness to take chances drops sharply.

Such mood swings can lead you to jump in and out of the market and chase good performance, with devastating results.

According to a 2007 study of investor returns from 1991 to 2004 published in the Journal of Banking & Finance, the average investor pays a 1.5-percentage-point annual penalty for that kind of behavior.

My advice is to never rely on a risk questionnaire to tell you how much you should have in the market.

I ask about risk tolerance only to make the point that hypothetically losing half of your portfolio doesn't inspire the same fear that actually losing it will.

Your investment strategy should instead be based on your goals, your time horizon and what you've saved so far. Success will come from sticking to your plan.

But as you're learning now, buying stocks is emotional. Your investments represent security and freedom. And as you watch your balances decline, you see your dreams fade too. Hence the nervous calls.

What I'm saying is that while I can't make any promises, I wouldn't bet against capitalism over the long run. Chances are, you'll look back and see that this was a buying opportunity.

In times like these, you should push yourself to take more risk than feels comfortable. And in good times, go out on a limb less than you're inclined to.

I'm feeling shock too. But I've bought more stock-index funds. It's scary, but it's also likely the right thing to do.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com. To top of page

Send feedback to Money Magazine
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
The best gadget gifts for 2017 A holiday gift guide for anyone who wants to spread some techie joy. More
14 awesome toys for the holiday wish list From a DIY Star Wars Droid to a new Hatchimals toy and interactive Fingerlings, these products are worthy of a coveted spot on holiday wish lists. More
11 tasty treats to bring back from a business trip Nothing is as crowd-pleasing or pragmatic as edible souvenirs. We've found foodie gifts that are both delicious and distinguished in 11 popular business destinations. More