The most important principle of successful investing is to understand the role our emotions play in shaping our investment decisions. Successful investors are aware of their natural inclination to swing between fear and greed when it comes to making investment decisions.

The nature of investments and investing requires a long-term view and commitment to the basic principles of investing - it is not a short-term endeavor or road to quick riches. As the nation’s economy moves through cycles, our emotions will swing with the general public’s outlook and mood. As investors, we are not isolated from the opinions and emotions of others.

We are constantly reading and hearing the opinions of “experts” and commentators, as they articulate conflicting views on the same subject. While it’s comforting to hear others confirm our opinions about our investments or the economic outlook, it can be a serious mistake to block out contrary opinions, especially during the peaks and valleys of a stock market cycle.

When the stock market is reaching new highs, investors are optimistic and enjoying the ride as the value of their portfolios continue to increase. This is a critical time for investors. They feel confirmed that the decisions about their investments are on-track, obviously correct, and don’t need to be changed. Their emotions say hang in there, don’t leave any money on the table by selling out early.

However, just the opposite occurs when month after month the stock market reaches new lows. This is an equally critical time for investors. They become fearful that more losses are ahead. This is not the time to make new commitments to stocks. They begin to question their decision to continue to own stocks and often will sell out to avoid further losses as the market indices reach lower lows. Eventually, the phenomena of Capitulation will occur and everyone gives up and sells - creating very high volume and sharply lower prices.

Our normal reaction to these events - higher highs and lower lows - will cause us to become greedy from over optimism, as we buy and hold at market tops, or fearful and sell at market lows.

So what is an investor to do? They need to understand and recognize when their normal emotions are kicking in. Investors must avoid making investment decisions that are influenced by their emotions - fear and greed.

Take the time to review and evaluate your past investing performance. Look specifically at the investments which have lost money. Try to see what caused the loss, other than selling the investment for less than you paid. Answer the following questions for each losing investment:

• How long did you own the investment?
• What motivated you to buy the investment?
• Recommendation.
• Your analysis.
• Felt like a good investment at the time.
• Other reason – be specific.
• What motivated you to sell the investment?
• Recommendation.
• Your analysis.
• Seemed like it would lose further value.
• Other reason – be specific.
• Do you see any emotional influence in either of the decisions to buy or sell?
• Has the value of the investment turned around and increased after you sold?

Hindsight will always be 20/20. We can take advantage of our hindsight when we learn from past mistakes. This life principle is just as true for our investing as it is for our other personal choices. List several lessons you learned from looking back at investment mistakes. For example, some lessons will involve:

• Fundamental quality of the underlying security (company or mutual fund) was poor.
• Understanding my emotions at the time of purchase and sale.
• Purchasing/selling an investment on partial or emotional information or recommendation.
• The investment did not fit my comfort level for risk (risk tolerance).
• Level of influence from outside sources - people or media.
• Did not provide diversification for my portfolio.
• Did not meet an objective for my portfolio.
• Did not contribute to the asset balance for my portfolio (asset allocation).

Another emotional mistake investors make is trying to “time the market.” That’s a fool’s game. Many investors have tried but few are successful. I don’t know of any who are consistently successful. When more than 90% of mutual fund managers do not beat the static benchmark indexes that their funds try to match, why do investors, who don’t spend eight hours a day managing portfolios and analyzing stocks, think that they can beat the market? The reality is they can’t.

So what is an investor to do? The following principles will help keep you and your investments on track.

• Establish financial goals - spending, saving, investing, and debt elimination.
• Recognize you have the normal investing emotions - fear and greed.
• Understand your personal risk tolerance.
• Determine an asset allocation for your investment portfolio.
• Develop a long-term investment plan - which you can live with, in both up and down markets.
• Keep your portfolio diversified - use mutual funds or ETFs.
• Rebalance your portfolio annually to maintain your asset allocation.
• Be consistent with your investing and fund purchases - don’t try to time the market.
• Continue to inform and educate yourself on the principles of investing.