It seems everyone has an opinion about what is coming next which makes it difficult to tune out the noise and “predictions” of market pundits. But if there is one thing we have learned from the media, it is that no one seems to have a clue what is coming next. There is never a shortage of fear or greed driving investors in global markets in any year. Fear and greed are not new, but sometimes investors have a tough time recognizing their emotions and how they may be impacting critical investment decisions.
Just as the market can become overwhelmed with greed, the same can happen with fear. When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining even further losses. But being too fearful can be just as costly as being too greedy.
A mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors abandoned their plans because fear overran them. Granted, losing a large portion of your equity portfolio’s worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.
On the opposite end of the spectrum investors get caught up in greed. After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time.
This “get-rich-quick” mentality makes it hard to maintain gains and keep to a strict investment plan over the long term. This is especially difficult amid such a frenzy, or as the former Federal Reserve chairman, Alan Greenspan famously put it, the “irrational exuberance” of the overall market. It’s times like these when it is crucial to maintain an even keel and stick to the basics of investing, such as maintaining a long-term horizon.
All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes.
Avoid getting swept up in the dominant market sentiment of the day, which can be driven by current events, and remember the fundamentals of investing. It is also important to choose a suitable asset allocation. For example, if you are an extremely risk averse person, you are likely to be more susceptible to being overrun by the fear dominating the market, and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.
Keep in mind this isn’t as easy as it sounds. There’s a fine line between controlling your emotions and being just plain stubborn. Many investors find regular meetings with a trusted advisor that has taken the time to get to know you and your family to be critical in staying on track.