Frugal Living Investing 101 Money Management Beyond Money

My Personal Finance Management Highlight My Dual Personality

by MoneyNing

The other day, someone told me that he is happy when the market goes down because he thinks of how many more shares he get to buy with his next 401k plan contribution. I quickly agreed with this since I feel that it is good personal finance management. However, after thinking about it a little bit more, I realized that every time the market is down, I’m not as happy as if the market went up. So how can I be happy and not happy by the same thing?

I’m one of those people that trade individual stocks in my brokerage account. Although I do not trade crazily, I can buy or sell shares on any given day. This has got me looking at the stock market and my daily performances many more times than if I were just investing in the Vanguard Total Market Fund for instance. So, when the market turns south, there is this sickening feeling that develops within me as I know my hard earned money going down the drain.

On the other hand, my 401k has basically three funds.

  • One that tracks the Russell 2000 Index: 40%
  • One that tracks the S&P 500 Index: 40%
  • One that tracks the MSCI EAFE Index: 20%

With this portfolio, I honestly do not worry much about. I made two changes last year, and one this year (I have automatic re-balancing turned on though and it auto-adjusts every 6 months back to the percentage allocation). Every time there is a huge decline, seeing my total portfolio’s worth get slash does not bother me nearly as much as seeing the one in my brokerage does. I can honestly say that when there is a down day, I feel like I can buy more shares and will be better off in the long term.

So, do I really have dual personality? What is the difference between the two accounts?

After some thought, I have come up with some reasons why this is happening:

  1. My 401k has a very long term horizon while my brokerage is more short term: Historically, the trend of stocks has always gone up. It goes up and down for days and weeks at a time, but the overall trend is always up gradually. For a good visual, go to yahoo finance or any other sites that show stock performances. From there, look at any index fund, and look at the short term (last 5 days) where you usually see major up and down swings (relatively) and compare this to the 5 year chart. You will see what I mean.
  2. In my brokerage account, I am buying individual stocks which have considerably more risk than a fund (which can have 2000+ stocks): This might be the classical risk tolerance issue. Since I’m afraid that my stocks can decline and never rise back up (Lucent, Enron anyone?), I get nervous when I start losing money on any stock.
  3. My 401k has less money in it: This might have an effect, but my 401k is quickly gaining worth (12 months ago, it was 25% of the brokerage account net worth compared to 50% now).
  4. My 401k plan performance is not as visible as my brokerage performance: For instance, my brokerage (Etrade Financial) allows me to see how much I bought each share, when, etc all in the same screen neatly laid out but I would have to dig deeper to see the same thing from my 401k plan.
  5. I do not look at my 401k performance often: Another key point, I really do not worry about my 401k much since I contribute to it automatically, and that I know it will grow over the long term. (Last year, the performance was 12.5% and it has been even better YTD).

What a sigh of relief! I am not so messed up after all!

The important thing is what I can do to minimize my sadness when the market goes down on the brokerage account side. The key I believe is diversification. I obviously cannot run my own mutual fund by buying 2000+ stocks. However, I can buy stocks that are not in the same sector, ranging from big caps to small caps to reduce the risk that any bad news in any sector will wipe out my hard earned money. I also bought some index funds within my brokerage account, so those funds will stabilize the overall worth of the portfolio since they have a small day to day swing.

Tagged as: Investing

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{ 4 comments }

Anonymous May 7, 2007 at 11:05 am

Diversification is always what’s most important. Don’t let yourself forget this.

Rick Woods May 7, 2007 at 1:55 pm

Happens to everyone. Don’t get too worried about your dual personality. ;)

Good article.

Anonymous May 7, 2007 at 2:47 pm

Totally OT, but the stock market is up today! Yay!

KMull May 15, 2007 at 7:07 am

I kind of do the same thing. I’d never thought of it like that.

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