The lesson from Warren Buffet

Be fearful when others are greedy, and be greedy when others are fearful. Warren Buffet

If youre in the stock market and are like most investors, youve taken hit over the past few months. But this is not the time to despair. Remember the old Chinese adage: In every crisis theres an opportunity.

Financial guru Warren Buffet, one of America most respected investors, wrote in an Oct. 17 column in the New York Times that, although he did not know how the market would perform in the short term, what is likely, however, is that the market will move higher, perhaps substantially higher, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

How can you weather these economically difficult times and prepare for better days? Here are a few ideas:

1. Consult your professional tax preparer and consider selling part of your taxable stock or mutual fund portfolio at a loss at the end of the year to reduce your taxes for next year.

2. Invest (or reinvest) only discretionary money. Never invest any money intended for living expenses, education, a major payment or your financial safety net. Dont invest money you cant afford to lose.

3. The older you are, the more important it is to make investment decisions with a lower-risk threshold.

4. Avoid investing more than three percent of your total stock and mutual fund portfolio in any individual company.

5. Consider investing in low management fee, no load index mutual funds.

6. Take the long-term approach to investing. Historically, the stock market has gone up over time. Periods of downturn may present good opportunities.

7. Consider the dollar cost averaging approach. Divide your investment pot into equal increments of ten to 24 (depending on the amount and your risk tolerance), and invest one increment per month. When the market is down, youre also investing to lower the average cost per share of your stocks and mutual funds, so your investment may begin to show a profit sooner when the market recovers.

One of the most important keys to investing is learning to control greed and fear. If you cant stomach the daily volatility of the stock market, youre at a psychological disadvantage and this type of investment may not be right for you.

No one knows for sure how the market is going to perform. However, with a methodical, disciplined approach, especially when fear pervades, one can increase the possibility of long-term financial success.

Note: This article is intended to provide general, educational information only. It is neither intended nor does it serve as investment advice.

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Preston Ni is a professor of communication studies, Fortune 500 trainer, executive coach, and organizational change consultant. His column appears the first Friday of every month. Write to Preston at commsuccess@nipreston.com, and access free resources at nipreston.com. © 2008 by Preston C. Ni. All rights reserved.