Bottle That Sinking Feeling

With today's market sell-off triggered by the Greek downgrade, you might get a little of that sinking feeling again in the pit of your stomach. If you've been cranking up your investment risk lately, bottling that sinking feeling could save you a lot of money.

For whatever reason, investors tend to have very short memories. Once a financial crisis passes, people go back to their old ways of thinking and acting. Over the last few weeks, the chatter from Wall Street and economists has been nothing but upbeat, all while the Greek debt pot has been boiling.

You'd think that investors would be a bit more concerned about the sovereign debt issues. I mean borrowers not being able to pay back their loans is what started the crisis. Yet, for whatever reason, it's hard to remember how you felt a year or two ago as the markets and the economy teetered on the brink of collapse. It sounds strange, but trying to remember how bad you felt about the risks to your financial security are often good ways to keep you disciplined.

In general, we tend to be overly optimistic in our financial dealings. We all think we'll make more money than we eventually do and that we're better investors than we actually are. All that optimism can cost you a lot of money when the world turns left and you're positioned for it to turn right.

Now a basic sense of optimism is necessary to invest at all, and you've got to have faith that the capital markets basically work over long cycles. Otherwise, there's no reason to invest. But you have to balance that optimism with a healthy dose of concern. And market declines heighten our perception of risk, but by the time it declines, it's often too late to make meaningful changes. And making changes during a crisis while you aren't in your right mind generally doesn't turn out too well.

The time to think about these things is when markets are good. That's when you're most likely to lose your focus and discipline. So when we have days like today, think hard about how you feel and try to commit that feeling of concern to memory. Then over time use that memory to check the risk profile on your investments.

If you want to channel your optimism, channel it into your job and career. Have a passion for what you do and be optimistic about being the best you can be. But when you get that paycheck and sock away some money in the markets, scale back that optimism and realize that a healthy dose of skepticism will help you both grow and protect your money.

Bottom line. Having the discipline to always think about what might go wrong in the financial markets is necessary for your long-term success.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.

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