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Trade With Your Head, Not Your Heart

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By heart I mean emotions. I personally think you should invest in companies whose goals you believe in… with respect to that, you should trade with your heart.

If you haven’t been paying attention to the markets these last two days, perk up, it’s a perfect example of how you should invest with your head and not with your heart. Yesterday, the Fed bumped up interest rates another quarter point, as expected, and gave guidance that suggested further rate hikes were in our future. What was supposed to be routine, suddenly went sour. According to Google Finance’s historical records, at 2:16pm, the Dow Jones Industrial Average was at 11,267.08. (the meeting is at 2pm) By 2:32pm, it was at 11,193.04, or a loss of 74.04 in sixteen minutes. The Dow closed at 11,156.86 – a drop of 110.22 from the 2:16pm value.

None of the fundamentals concerning the companies in the Dow changed. The prospects of our economy didn’t really change either, still humming along even with the Fed fiddling with rates to control inflation. There wasn’t a real obvious reason for the fall other than a gut-reaction by the markets that, if you looked today, were a little excessive. As of this writing, the Dow is up 77.28 to 11,228.42 which is about where it opened yesterday. Kirk has declared the market in full lift-off mode and that those who sold yesterday found themselves on the business end of Mr. Market this morning.

The moral of this story? Don’t trade with your heart. Don’t buy into the hype and don’t sell on your fears. Keep your head screwed on straight and let the numbers do the talking.

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4 Responses to “Trade With Your Head, Not Your Heart”

  1. LAMoneyGuy says:

    Good advice. This is why I believe that systematic investing, such as in your 401k, or using dollar cost averaging is the best course for many who would otherwise panic sell or buy too late trying to jump on the greed bandwagon. Not entirely scientific, but 6 out of 7 respondents on Laws of Finance choose dollar cost averaging. Yet only 2 out of 3 dentists recommend sugarless gum. Who is that other dentist?

  2. Anonymous says:

    I always thought trading with your heart meant buying shares of companies who’s mission you love, but who’s #s you hate. Check out OATS (organic grocery chain). The company went up like 60% in the last 6 months, but the P/E is like 170.

    What you’ve described seems a lot less noble. It’s more like trading with your gastrointestinal tract: you feed them sugar and they buy, then they have tummy aches and they sell. Even gold and some foreign etfs fell yesterday which is totally counterintuitive (but OATS went up, I can’t believe it! Talk about trading with your stomach!).

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