A friend of mine told me a couple weeks ago that he had sold all stock holdings in his retirement account. He had had enough of the stock market that hit one low after another. Within days of his sale the market staged a tremendous rally. His timing was very unfortunate. Now he is considering getting back into it. So, he asked me for advice. That is how I actually found out what he did. Apparently now he needs a second or third or fourth opinion since he may have lost confidence in his ability to read the market’s movements correctly.

Guess what? I don’t have that ability, either. Nobody does for that matter. Even the best investors in the world don’t get it right all the time. The “only” thing they get right is their understanding of what they are doing at the time they make particular investment decisions. That is the only thing we can be sure about.

When we set up a retirement savings account and we decide how much of our savings should go into stocks, bonds, or cash, we should think about it carefully right at the beginning. We should educate ourselves about the risks involved with each investment and what consequences these risks may have on our savings. And then we should just run with it.

Our appetite for risk does not change that much from one year to the next. However, other things change, sometimes very quickly, like our emotions. Greed and fear are two of these irrational responses to stock market moves. Recently people have been getting really scared about the value of their investments. Fear overpowers their decision making that can lead to a bad decision my friend made not too long ago, which he regrets right now. (He may not regret it a few months from now, unless he bought back into the market at a high price.)

We can only make sure that fear and greed do not dominate our decision making. (Yes, greed used to be a prevalent emotional problem until a few years ago, when the market hit one new high after another. We may just have forgotten greed now since we are all consumed by fear.) We must have a good understanding what we do with our retirement savings from the outset. We must know why we are in the game. Only then will be act like the “big boys” and enjoy success.

Tags: retirement savings