Investing article: Keep your Emotions Out of your Investments

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You should avoid mixing your emotions and your stock decisions. Money is an emotional thing. We often invest so much of ourselves into our investments that we find that we stop making logical decisions. We make decisions that are based on the way we feel. And that isn't a healthy way to manage your investments.

If you are holding onto a losing stock in hopes that it will go up again, you are investing emotionally. If you are afraid of making a mistake, so you won't sell, you are investing emotionally.

The bare truth is that you cannot be optimistic in your stock decisions. You can't be hopeful. You have to invest by the numbers, not the gut feeling.

While having a good attitude makes you a pleasant person, you shouldn't let it affect your stock decisions. If you investing $1000 in a stock and it drops to $500, what do you do? Do you hope that the stock will bounce back, so you just keep holding on?

The odds are against the stock regaining what you have lost. The stock would need a 100% gain to get you back to $1,000. That is rarely seen, and if it is it takes a really long time.

You have two reasons to sell a stock: personal reasons and market reasons.

Personal reasons to sell include your risk tolerance, personal financial situation, ethical conflicts, active trading for a better stock or liquidation for retirement or other goal. For example, you may have reached the point that you are ready to retire. It is now time to start liquidating your stocks. Other goals may include your child's college education, a well deserved vacation or real estate purchases.

Market reasons include the price of the stock decreasing. How do you know when to sell a falling stock. You should set a floor for your stock. For example, you may be willing to let the stock fall 10% before you sell. This floor prevents a small loss from becoming a big loss.

Other market reasons include the downfall of a company, the overvaluation of a stock and the rebalancing of your portfolio. For example, you may have decided that the best allocation for your portfolio and your investment goals is 50% stocks, 40% bonds and 10% cash. You've done really well and now your stocks are valued at 70% of your total portfolio. Your best move is to rebalance your portfolio by selling stock and bringing the allocations back where they belong.

There are many reasons to sell a stock. Remember to keep your emotions out of the decision. Base your decisions on the numbers. They won't lead you astray. Consider all of the consequences thoroughly -- taxes, transaction costs, etc. -- before you sell a stock. And remember, there is nothing wrong with admitting that a stock just isn't working for you and moving on with other investments.

About the author of Keep your Emotions Out of your Investments

Martin Lukac http://www.MartinLukac.com , represents http://www.RateEmpire.com , an Internet consumer banking marketplace. RateEmpire.com is a destination site of personal finance, investing, taxes and mortgage rates. RateEmpire.com provides mortgage guides and financial rates and information. RateEmpire.com also operates a financial portal #1 American Financial, found at http://www.1AmericanFinancial.com