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THE CYCLE OF MARKET EMOTIONS

THE CYCLE OF MARKET EMOTIONS

April 01, 2020
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Although today finished on an uptick, these past few weeks have been a wild ride in the investment world, as fear surrounding the COVID-19 virus continues to swirl.  Last week stock prices seesawed  but ended the week further down.  Oil prices fell off a cliff finishing the week off nearly 37% in just the 5 days.  And despite the decline in stock prices, Treasury yields increased, hurting bond investors.

Some of our clients are recognizing this investment marketplace as a generational opportunity to capitalize on pricing.  For example, Apple was selling for $327 a share on February 12th; at the close today it was available for $246 or 25% less.  In the long-run is Apple worth 25% less now than in February, or is this a (over)reaction to today’s headlines?  Don’t have money available to purchase more stock?   Low interest rates have led to a record level of refinance applications on personal residences. 

Where some are excited for the opportunity, others see fear.  Psychology instills in all humans a basic instinct for either flight or fight.  Without investment education or years of experience, it is natural to look for an exit strategy when the markets get rough as they are now.  This fear is natural.

When you first met with us, we established a financial plan to achieve your long-term goals.  An asset allocation was tailored for each client individually.  Although lower account values do not bring us joy, your plan was drafted knowing that a drawdown in the stock market was not only possible, but probable.

What makes volatile stock markets truly scary is our own Cognitive Limitations.  Our mind convinces us that what exists now is all that will ever be.  Your imagination dreams up scenarios where every day is negative until there is nothing left at all.  Intellectually, you know this is not possible, but your mind’s limitations deflect the calming mantra that, “This too shall pass”.

You are further pushed to act due to a bias toward action.  When results are not achieved to our satisfaction, our brain tells us we cannot remain still.  “Don’t just stand there.  Do something!” becomes the rally cry.  The impulse is to throw out all that we know about investing and sell those securities at low prices, telling ourselves that once the price goes back up, we can buy back in.  Selling low and then buying high has never worked as an investment strategy and never will.

As humans we all ride the cycle of market emotions.  Fear and greed take turns altering our view of the investment world around us.  Look at the illustration below and see if your current feelings are driven more by the emotions shown in black at the bottom of the chart or the logical evaluation shown in a bubble along the curve.  Perhaps the most difficult part of investing is to divorce yourself of the emotions that come with wild swings in the investment marketplace.  Coming off the worst week in the stock market since 2008, and the worst week in oil prices ever, today the Dow Jones Industrial Average had its best day since 1933.  It is important to recognize that you and your investment advisor have the intestinal fortitude to stay the course and see through your financial plan until all of your goals are accomplished.

When I was a teenager my friends and I would visit the amusement park for excitement.  Our favorite thing to do was get on the scariest ride and throw our hands in the air ignoring the warnings to hold onto the safety bar.   Eventually, the ride would win and we would grab the bar after one particular sharp turn.   Intellectually, we all knew that the ride was designed in such a way that we would never fall out, but sooner or later the speed of the car and the sudden jolts caused our brain to override the intellect and we all grabbed the bar.

We are not teenagers anymore, and life is not an amusement park ride.  When your emotions override your intellect and you get scared, it is Ok to grab the safety bar for support.  Reach out to us and share your concerns.  Let us help guide you back to safety.  Because when life gets scary it is acceptable to grab on for support, but it is not acceptable to jump out of the car. 

On a related note, market volatility can lead to emotional stress.  When stress reaches a boiling point, it can be downright dangerous.  If you see a loved one, friend or neighbor stressed by the recent volatility in the market please ask them to give us a call.  Despite the increased demands on our time, we will make room for them, and there will be no charge.  Don’t let them wait until it is too late.