The Cycle of Market Emotions
It’s really important for people to understand that there are peaks and valleys in life as well as in the investment markets, and you should be humble when you’re at the peak and hopeful when you’re in the valley.
The Cycle of Market Emotions
The image above may be familiar to many investors – it shows the sequence of emotions during a market cycle. It’s increasingly positive on the way up to the peak, and then progressively negative on the way down to the valley before starting back up again.
The irony is, of course, that investors feel happiest when they are at the highest market peril, and they want to jump out a window when their potential upside is the greatest. This is basic behavioral finance stuff.
These peaks and valleys don’t correspond just to markets or to the good and bad events in your life – they’re also how you feel inside and how you respond to outside events. How you feel depends on how you see your situation. Do you have hope and confidence, or are you paralyzed by negativity and despair? Do you come from a perspective of abundance, or one of scarcity?
I believe you need to be able to separate the events in your life from how you feel about yourself as a person. If you don’t, your emotions can take control and, as an investor, you end up buying at the top and selling at the bottom. When this happens, of course, problems are compounded in a downward spiral. More behavioral finance stuff.
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. Volatility itself isn’t good or bad, it’s what they do with it that matters. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides. And just as important is to understand that there are times when the wind is at your back, and times when you have to row like crazy. Right now I’m rowing.
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