Forget Prozac, Try Dollar-Cost Averaging
(MONEY Magazine) – After studying psychiatry at Harvard in the 1960s, John W. Schott earned a stockbroker's license. Now the psychoanalyst and pioneer in the study of investor psychology is also a part-time portfolio manager at Steinberg Global Asset Management. His recent book, Mind over Money, offers help in overcoming emotional handicaps that interfere with investing decisions. Staff writer Mari McQueen recently asked Schott to analyze the market.
Q. How are investor emotions helping to create the market's wild swings?
A. The market has a manic-depressive quality. When we are in a bull market, it has a euphoric mood. It tends to interpret all news as good news. When we have a bear market, it is in a depressed phase. And now the dominant feeling is that we are going to lose.
Q. What are the emotional stages of a bear market?
A. The earliest stage is characterized by denial, increased anxiety and fear. The second stage is panic. People suddenly say, "I've got to sell!" The third is despair; people stop buying stocks.
Q. If a person is manic-depressive, the treatment goal is to smooth out their moods. Is it the same with investors?
A. Yes. And there are different methods you can use. There's dollar-cost averaging. Or you can concentrate purchases in the low price/earnings group and sell when they move into the higher group.