Success lies in taming fear and greed impulses

Question: I got very conservative after the big crash in the market a few years ago. With that behind us now, should I be getting more aggressive in my investments? I am retired, but I live simply and my pension income is enough to meet my needs. I want to see my money grow.

Answer: Can you feel it?

That movement you feel beneath your feet is the shift taking place in the hearts and minds of America's investors.

The pendulum is once again swinging.

Tick! A few years ago it swung full force towards the dominant emotion of the day: fear.

Tock! Today, if you listen ever so carefully, you can hear (and even feel) that same pendulum beginning its journey to the equal and opposite extreme: greed.

It is axiomatic that the twin (yet opposite) emotions that rule the financial markets are fear and greed.

Fear enters the picture during so-called bear markets -- those excruciating periods of time when the financial markets go down by 20 percent or more. That happens (on average) every five years. When the bear market of 2000 hit, the bear had been in hibernation for about ten years, so he thought it would be a good idea to double up in both duration and severity.

The problem with fear is that it's never on time. Once the event causing the fear (a bear market) has arrived, it's too late -- your investments are already down.

Usually, fear only causes investors to lock in their losses, instead of patiently waiting for their account balances to rise again.

But fear's equally ugly twin, greed, can also set us up for a big fall.

We American's tend to have short attention spans and wide emotion swings. Greed causes us to lie to ourselves about the risks of the financial markets and take unnecessary chances.

Study after study has shown that individual investors tend to get greedy when the markets are at the top and get scared when markets are approaching the bottom. One study I saw indicated that during the 1980s and 1990s, when the stock market grew in excess of 10 percent annually, the individual investor realized less than 3 percent of that gain due to their poor timing.

Timing dictated by fear and greed.

The bad news is that you cannot get rid of fear and greed.

But the good news is that you can overcome them.

The only "cure" for fear and greed is a powerful dual dose of patience and perspective.

Patience is required because any investment portfolio needs adequate time to grow.

Babies take nine months to be ready for delivery. Trees can take 20 years. A good investment program is somewhere in the middle; it takes five years for an investment portfolio to perform. When it comes to investments, anything less than five years is really speculation (yet another offspring of fear and greed).

Perspective is the art of understanding the big picture. Viewed from the wrong side, a tapestry looks like a mangled thicket of yarn. Viewed correctly, the beauty and artistry stand out.

Perspective sees sudden market dips as opportunities and sudden market rises as illusory. Reality is the long-term, predictable rise that the U.S. economy (and financial markets) has experienced for the last 100 years.

Your investment portfolio should be put together to weather the storms and catch the favorable winds. If you are changing your portfolio every time your feelings about the future change, you're in for a rough ride.

Please…don't let your investment strategy be knocked down by the emotional pendulum as it swings from fear to greed.