Cycle of Market Emotions

There is no getting by our emotions at any time, especially when it comes to investing. The same brain chemicals and responses to kittens (friendly), or mountain lions (fear) right in front of us in our yard, happen when we look at our investments.

 

We forget the big picture though. So … here it is:


Notice the greatest risk is at the top of the emotional cycle because that tends to correspond to market peaks as well. The opposite occurs at market bottoms. Although the cycle is depicted smoothly here, what happens with our behavior though, from the market trough it takes some time to begin to believe growth is real and sustainable. At some point, the belief takes hold and quickly changes after that to relief and euphoria. From the peak, the changes tend to be sudden and shocking leading to the carefulness I just described.

(Link to above presentation)

What’s the secret then? Establishing a realistic asset allocation based on prudent principles and global allocation (which reduces the risk your portfolio goes to zero; although it still goes down in value – it goes down less). For some, this realistic allocation may be a bit more aggressive, and for others it may be a bit more conservative. The key is that is is something you can live with, not your neighbor or water cooler conversationalist.

What else can you control (short video)? Your plan … which by the way, should include the reality of market ups and downs.

Remember that market declines in general to 5% are considered “noise,” 5 to 10% are called “dips,” and your emotions may be getting the best of you over noise and dips … (10 -15% are considered “moderate corrections,”  15-20% are “severe corrections,” and over 20% is called a “bear market.”) Bull and Bear Markets are defined as general market trends either up or down. Funny, nobody gets concerned when things seem to be going well.

See also Panic? Why?

 

, , , , ,

Trackbacks/Pingbacks

  1. Has fear left markets? How do we know? | Better Financial Education Blog - March 16, 2012

    […] me a sense of the cumulative sentiment so I may evaluate where the market sentiment is on the Cycle of  Market Emotion. Talking with you I get a sense of where you are on the […]

  2. Recent Losses Continue to Haunt Equity Investors – On Wall Street | Better Financial Education Blog - May 18, 2012

    […] See also   Panic? Why?   Cycle of Market Emotions. […]

  3. This is what “buy low” feels like (when it is time) | Better Financial Education Blog - June 17, 2012

    […] Cycle of market emotions. […]

  4. Wait for a better market? | Better Financial Education Blog - August 1, 2012

    […] is how “buy low” feels. It feels like there is less risk when things are going up … but that is when the risk is actually going up. What I mean is that the value of what you […]

  5. Whew! We are back near market peaks! Yippee? Or, oh-no? | Better Financial Education Blog - January 25, 2013

    […] when prices are higher you buy less than when prices are lower. I refer you to the chart in the Cycle of Market Emotions blog I wrote before. When emotions are the most jubilant often coincides with the times when the […]

  6. Dow 15,000! Yipee? Or, be careful? | Better Financial Education Blog - April 12, 2013

    […] if you look at the cycle of market emotions graph, when markets are up often may be when there’s greater risk of their decline. People […]

  7. What's A Bubble? (Nobel Edition) | NPR | Better Financial Education Blog - November 13, 2013

    […] of poor investing discipline happens when one lets emotions rule decisions – fear or greed – either leads to extremes at times. Poor discipline costs […]

Leave a Reply