Stock Investing - Don't Be Rhinophobic

Asset - Stock Investing - Don't Be Rhinophobic

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Rhinophobia is an investor's disease: the dread of having any cash. The rhinophobic feels that all of his or her ''stock money'' must be fully invested at all times.

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Let's say you are an individual investor and have located on an asset budget of 60% stocks, 40% bonds. So if your total investable money is 0,000, then ,000 is your ''stock money.''

Question: Should all of your stock money always be invested in stocks? If you riposte ''Yes,'' you have rhinophobia and should see a doctor. Or just read the rest of this article. Because the best answer-more likely to keep you financially healthy-is ''No.''

It is an unfortunate myth in the stock-investment industry-including many pundits and mutual funds-that the smartest investors are fully invested at all times. In other words, they spend cash as soon as they get their hands on it, ''never sell,'' and if they do sell, they reinvest the proceeds immediately. This myth is obviously a succeed of a dogmatic Buy-and-Hold ideology.

The speculate that the myth is unfortunate is that it causes people to lose money. It is the speculate why so many investors who were fully invested when the shop peaked in early 2000 stayed fully invested as the shop went all the down over the next three years, rather than getting out until the crash stopped. It's also why many of them will stay fully invested the next time a bubble pops or a bear shop claws them up.

Even those perceived to be the most conservative stock investors-''value'' investors with a Buy-and-Hold bent-in fact time their moves to avoid rhinophobia. They do it when they determine not to purchase a stock because it does not meet their valuation criteria (''We're waiting for a best price''), or to sell a stock because it has met their target price (''We think this stock has had its run-we are very disciplined about selling when a stock hits our target price''). They are for real practicing a form of (cover your kids' eyes here) timing.

If you ask the average informed investor what Warren Buffett's investing style is, he or she is likely to say, ''Buffett is a value investor with a Buy-and-Hold approach.'' And that would be commonly accurate. But Buffett avoids rhinophobia. Here's what he said in his 2003 annual letter to Berkshire Hathaway shareholders: ''Sitting it out is no fun. But occasionally, prosperous investing requires inactivity.'' As recently as May, 2006, Forbes magazine reported that ''Buffett, to the vexation of investors, is sitting on a mountain of cash and bonds (50% of Berkshire's shop value) waiting for best opportunities.''

Why would that vex Berkshire Hathaway shareholders? Buffett obviously knows what he's doing, judging by his report over the past five decades. He is, after all, the world's richest someone whose wealth came entirely from investing. What any ''vexed'' shareholders are forgetting, and he is not, is that Rule #1 in stock investing is, ''Don't lose money.'' Sometimes, not losing money requires the Sensible Stock Investor to have his or her ''stock money'' in cash, not in stocks.

If, for whatever reason, you sell a stock, there may be times when you do not want to reinvest the money right away. Rather, you may want to hold it in cash for a while, until conditions change for the better. Same thing if you come into possession of new money. Don't be afraid to be uninvested. If you cannot find adequate good places for your ''stock money,'' let it sit in cash until valuations improve, shop conditions change, or you eye a promising new venture opportunity.

In other words, your strategy as a Sensible Stock Investor should comprise a strategy for cash. To administrate a stock portfolio sensibly, cash is a legitimate parking place for ''stock money'' when:

o You're in a commonly declining or sideways market-nothing seems to be doing well.

o You're in a deflating bubble, like the 2000-2002 deflation of the 1990s bubble.

o No great stock venture opportunities are apparent.

o You are in a safety mode.

When you are an individual investor, it is like running your own diminutive company or mutual fund. You want to run it intelligently. Now, the excellent fellowships that you spend in do not ignore timing in running their own businesses. They do not mindlessly payment ahead with relentless stock introductions, marketing campaigns, and acquisitions, regardless of the economy, interest rates, and their own industry's conditions. Sometimes, they hang onto their investable cash (retained earnings) awaiting good opportunities. They study their markets, recognize trends and changes in their industry, and adjust their actions through a continual process of strategic evaluation. They administrate risks this way.

Don't expect whatever less of yourself as an investor. Why would you passively hang on to all your stocks during an extended period of certain shop decline, such as 2000-2002? It does not make sense. It is rhinophobia, a disease that will make you poorer.

Don't be rhinophobic. Your venture execution will be much best if you inoculate yourself against this disease. Do that by exercising caution. Be willing to spend new cash when you recognize a promising opportunity, but do not feel a need to be fully invested all the time. Cash is fine whenever good opportunities are not apparent.

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