Where are we now?
“Just like investment cycles, where markets move and investment options go up and down, it’s important to know about the cycle of our emotions”.
Stage 1: Optimism, thrill and euphoria
Investors all start with optimism. We commonly expect things to go our way, or we tend to expect a return for the risk of investing.
As expectations are met, it is common to get excited about the possibility of even greater returns and the excitement becomes thrilling as the returns exceed expectations.
At the top of the cycle is when investors experience euphoria. But it is here where investors are at the point of maximum financial risk. When we believe everything we touch turns to gold, we fool ourselves into believing we can beat the market, we cannot make mistakes, that excessive returns are commonplace and that we can tolerate higher levels of risk.
Stage 2: Complacency, denial, hope
The second phase of the cycle occurs when the market stops meeting our new lofty expectations and begins to turn. At first, we anxiously watch the market for any signs of direction. Anxiety turns to denial and then quickly to fear, as the value of the investments decline. Many people will then start to act defensively and may think about switching out of riskier assets to more defensive shares or other asset classes such as bonds.
Stage 3: Panic, capitulation, despondency
In the third phase of the cycle, the realities of a bear market come to the fore and an investor may become desperate. Many panic and withdraw from the market altogether – afraid of further losses. Those who persevere become despondent and wonder whether the markets are ever going to recover and whether they should be there at all.
Ironically, at these times, an investor will commonly fail to recognise they are actually at the point of maximum financial opportunity.
Stage 4: Scepticism, caution, worry
In the fourth stage of the cycle, investors may experience some scepticism when markets start to rise. They often have a sense of caution or worry, wondering if market growth will last – and may be reluctant to invest money in the market at a point when prices are still relatively low, and opportunities are attractive.
The temptation to fall into one of these traps can be resisted by developing and committing to a well-defined, long-term investment plan. This is the best way to protect yourself from your emotions.
Where is the market right now on the emotional roller-coaster?
It’s late in the market cycle, with evidence of thrill and euphoria and potentially signs of complacency and denial as markets corrected early February. While there is uncertainty about whether this is the peak of the cycle, we believe the risks investors face are asymmetric – the downswing is inevitable. One thing is for sure – we’re nearer to the point of maximum risk than the point of maximum opportunity.
Without a solid process, there is the very real risk of being drawn into fear as markets peak and capitulating with despondency at the cycle bottom. Investors can’t afford these mistakes.
For specific advice, speak with your OBT financial adviser on 5462 2277. Rodney Turner and OBT Financial Group are Authorised Representatives of Lonsdale Financial Group Ltd ABN 76 006 637 225 | AFSL 246934.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial planner and seek tax advice from a registered tax agent. Information is current at the date of issue and may change. This information and certain references, where indicated, are taken from sources believed to be accurate and correct. To the extent permitted by the Law, Lonsdale, its representatives, officers and employees accept no liability for any person that relies upon the information contained herein. Information is current at the date of issue and may change.
Source: Russell Investments