Don't be an "Opposite Day" investor

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February 1, 2010

Brian D. Humphrey The Rushville Republican Mon Feb 01, 2010, 08:32 AM EST

On Jan. 25, some of us celebrated Opposite Day. Its origins are murky and even its exact date is in some dispute, but Opposite Day has proved to be a source of fun for many people, especially children, who choose to eat breakfast at supper time and otherwise do things in reverse. However, you may find that acting in an “oppositional” manner is not so harmless at other times in your life – such as when you’re investing.

What types of “oppositional” moves should you avoid? Consider the following:

n Buying when prices are high. When the financial markets keep rising, many people continue buying more shares in the mistaken belief that “up” is the only direction their investments can go. But while it may be human nature to want to continue racking up gains, it’s not necessarily smart investing. The higher an investment has gone, the more likely it becomes that it will plateau or potentially even drop in value. Of course, an investment may one day rise again, but for the near term, its “upside potential” may be limited, so you might do better by finding other opportunities.

n Selling because prices are low. Just as some investors keep buying when prices are rising, others will sell when prices have dropped, just so they can “cut their losses.” This may be a mistake. If the investment still plays a role in your balanced portfolio, and you believe its prospects are still good, you may want to hold on to it despite its price. Furthermore, if your investment’s decline is due more to an overall drop in the market than a change in its own fundamentals, it may bounce back when the market recovers. Generally speaking, you should sell an investment if your goals or risk tolerance have changed, if you need to rebalance your portfolio or if the investment itself has undergone some type of shift that no longer makes it compatible with your needs.

n Investing too conservatively. Given the volatility we’ve seen in the last couple of years, it’s probably not too surprising that many investors have “pulled back” from the market and put a lot of money in certificates of deposit and other fixed-rate, low-return investments. While there is a place for these vehicles in your portfolio, you won’t want them to become too dominant because you still need to invest for growth if you’re going to achieve your long-term goals, such as a comfortable retirement. The amount of growth-oriented investments you own will depend on your risk tolerance and time horizon, but there’s no point in your life – even your retirement years – when you won’t need some growth potential.

n Failing to diversify. It is important to diversify your dollars among stocks, bonds, government securities and other investments. Even within these broad classes, you should diversify; for example, you should consider owning stocks representing different industries and bonds with a variety of issuers and maturities. While diversification by itself cannot guarantee a profit or protect against loss, it can help reduce the effects of volatility on your portfolio.

Opposite Day comes but once a year. But making “oppositional” investment moves can have long-lasting and potentially harmful effects. So take the time to explore your investment decisions carefully.

Brian D. Humphrey is an investment broker and financial management consultant.

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