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You’re Not the Only One Hiding

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I know you want to hide — and I don’t blame you. Lately, it seems that there are no safe ways to save and invest money. So the 401(k) and mutual fund statements that you get in the mail go unopened.

You’re not alone. Studies show that typical investors check the value of their holdings much less often during bad markets.

I asked Carnegie Mellon University economics and psychology professor George Loewenstein, PhD, about this urge and how to deal with it. Loewenstein, who has studied investor behavior during market crises, calls it the “Ostrich Effect.” After all, the fewer actions that you take, the fewer new mistakes you can make. And selling near the bottom or jumping back into the market too soon can be much more painful than doing nothing.

Of course, sticking your head in the sand isn’t the best strategy, Loewenstein says. Even in bad markets, you still need to rebalance your portfolio — to add money to types of investments that have fallen below your target allocations and subtract from those that have become too big a percentage of your portfolio. Instead of trying to pick the market bottom and pouring any extra cash in all at once, put a little bit in at a time, something that your 401(k) does automatically for you. In taxable accounts, sell some stocks and funds that have lost value since you bought them so that you can take a tax deduction. Plan specific dates, at least once or twice a year but hopefully more often, to thoroughly review all of your investment holdings. And if need be, cut back on spending so that you are not draining your assets to a dangerous degree.

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Source: Harry Berkowitz, editor, Bottom Line/Wealth Date: November 1, 2008
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