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Personal Factors In A Stock Portfolio

Nov 9, 2007
Investors can suffer significant losses because they did not take into consideration factors that had very little to do with markets or financial statements, government politics, or currency exchanges. Despite the professionalism of an investor, or their good intentions, the human factor always plays a major roll when investing money.

The human factor can sabotage the best efforts, but if the investor is aware of their own idioms, and their own preferences, then they can protect their wealth from foolhardy mistakes.

Spending Money

Despite the best laid plans of investors, there comes times when they want a little extra cash. It is easy to claim a stock is not performing, and the portfolio doesn't really need the extra funds, so there is no great loss if the funds are released.

An unexpected bill can sabotage anyone's budget. However, in many cases, it would be better to borrow the money than to impair a stock portfolio. Money is lost when the fees are paid, and the market may be down when the stocks are traded.

Grass is Greener Syndrome

There is nothing wrong with dumping an under-performing stock, but when it becomes habitual, or when you notice an 'itch' starting that grows until the investor creates a list of reasons to sell, then the sale may be more emotional than realistic.

The danger is that active trading can generate significant transaction costs - and taxes. Too many trades will quickly eat into any profits the portfolio did earn.

Moral and Ethical Conflicts

Today's investors are globally aware of both human conditions and environmental issues. Many investors are paying attention to the social, environmental, ethical, religious, and moral standards of the companies they invest in. This is not a bad reason to buy and sell, but it should be taken into consideration before trading stocks. Dumping a stock because the newspaper just reported that a company is burning bush to make room for expansion can be a costly mistake.

Risk Tolerance Too High

Risk is hard to measure, and harder to predict. Sometimes the most promising stocks bottom out, or go on a roller coaster ride the investor is not prepared to wait out. An individual's level of tolerance for worry and nervous tension is an valid factor in managing a stock portfolio.

If nerves play a factor in an investor's portfolio, then it is a wise decision for them to drop the roller coasters for more stable stocks that will let the investor sleep at night.

Lifestyle & Goals

People change, lives change, and needs change. Each of life style change changes the way an investor looks at their portfolio. The aggressive, high-risk portfolio of a twenty something professional is totally unacceptable for a father of three with a mortgage and two mini-vans.

A change in annual income, a marriage, a divorce, a death in the family, all of these will have a dramatic effect on the investor's goals and 'acceptable risk' levels. There is no reason why an investor should fear re-evaluating their goals and needs.

Rebalancing The Portfolio

The balance of stocks, bonds, and cash will vary over time. Sometimes investors rebalance their portfolios by selling some stocks to bring the percentages and 'risk factors' back in-line with the investor's projections and acceptable levels. This is a good thing, as long as the investor pays attention to how fast they sell off, and considers their taxes and capital gains, when estimating the cost of selling their stocks.
About the Author
Mark Walters is a third generation entrepreneur and author. He offers free training and investing videos designed to speed you towards financial independence at http://www.cashflowinstitute1.com/Articles.html
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