Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.
Fear and Greed - the two emotional states that have long been tied to the randomness, impulsiveness, and volatility connected to, and associated with, the stock market.
Fear drives us to get out of our investments and reduce the risk in our portfolio because we think the end, or an increasingly worse scenario, is upon us. When fear creeps in, investors want to sell fast, and they do not care the price at which that occurs.
Greed is a euphoria that has us chasing performance, increasing our risk, and looking for quick ways to get more and increase wealth. Investors will buy unconditionally and without regard for the price of entry or whether the momentum is sustainable.
Given the current market conditions, what is the emotional state of investors today – fearful, greedy, both, or neither?
Typically greed percolates in an environment of low volatility or complacency, and higher market prices that are moving higher. A “can’t lose” mentality.
Fear is usually prevalent when there is uncertainty, higher volatility, and dropping asset prices that cause a panic. A “sky is falling” mentality.
Another emotion that can also play a role in market psychology is Worry. This a condition where one feels anxious, concerned, stressed, and troubled by actual or potential problems.
During conditions of worry, investors do not have the same emotional reaction to price swings as they do when acting on fear or greed, nor do they have the same convictions (often emotionally driven) in their decisions. When worried, investors can approach choices with more pragmatism. They may be biased toward an outcome, but there is more contemplation and balance with one’s approach.
When someone worries, they feel more prepared for how they will react to either a fix to the problems, or a worsening condition after we have more information. Many times, when worry subsides due to having more evidence of a likely outcome (positive or negative), fear or greed may ramp-up.
So as I write this today, and after having conversations about the markets with many of late, another industry phrase comes to mind. The one that suggests we are currently climbing a Wall of Worry.
Despite the many negative factors that could, and many believe should cause some market pull-back or stumbling in stock prices, the market’s resilience remains notable of late. Whether it be economic, political, or geopolitical concerns, the stock market’s recent rise in spite of this worrisome news, suggests there is an underlying confidence in the stock market’s ability to overcome these concerns, and anticipates some resolution.
What happens after the Wall of Worry has been surmounted?
Who knows.. Often it depends on why it has been overcome, and where we are in the market cycle. The subsequent move in stock market prices may then incite some other investor sentiment or emotion based on the reaction to knowing more than we did before.
Regardless, for one’s personal financial situation, investment portfolios should be properly aligned with one’s risk tolerance, objectives, and time horizon. We often preach appropriate participation in stock markets, while maintaining flexibility so that we are prepared for any of the possible market reactions.
It’s our way of trying to temper or rationalize any of those emotions a dramatic market move may incite.
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