Welcome back to the intersection of fear and greed, the place that investors go to at times when stock markets are acting frothy and volatile and/or flirting with new highs.
With both of those conditions currently in play, it’s the place where a lot of investors now find themselves. The question is whether they have arrived or if they are lost.
Finding yourself now, amid the two most powerful emotions around investing, is particularly important given the uncertainty of what’s next, as the market tries to keep grinding higher through all of the concerns that could bring it down.
Before we see how this is playing out today, let’s consider the role that greed and fear can play in messing with decision-making.
“Getting rich” is the goal for most investors, doing it sooner rather than later is the ultimate ideal. Bull markets encourage investors to try to go fast.
The problem is that the more risk you take on hoping to generate speed, the harder it is to remain stable, to keep your eyes on the ultimate prize and maintain long-term discipline.
The flip side, of course, is fear, and people who are scared of losses either sell [which drives prices down and, when enough people are afraid, becomes self-fulfilling] or stay on the sidelines, failing to recognize that missing out on a strong market upswing can have the same impact on a long-term portfolio as a loss.
Here are four headlines investors have seen a lot recently, and why it’s important not to succumb to emotions about these stories now:
Headline: ‘The market hasn’t experienced a single 5% pullback this year.’
The Standard & Poor’s 500 is up more than 20 percent this year, with hardly a stumble along the way.
The greedy side of things suggests that happy days are here to stay, while the fearful side figures that we’re overdue for not only a small pullback, but for something much bigger.
Get greedy and the amount of money at risk – and the paper losses you suffer – could become nauseating when the market finally takes a small powder, but get fearful and you can miss a lot of good days waiting for a “better time to invest.”
The current streak without a 5 percent drop has passed 200 trading sessions, just the seventh time that has happened since the start of the 1960s, according to Dow Jones Market Data.
Four of those streaks went over 350 sessions, including the most recent case, which spanned 404 sessions from late June 2016 to the start of February 2018.
Call it a melt-up or climbing the proverbial “wall of worry,” but it’s not something you want to miss out on.
Striking the balance between greed and fear means avoiding the extremes – all-in or all-out – and making sure you can peacefully accept the results you are getting.
Headline: ‘Stocks may fall 15% by year-end, warns [insert big brokerage firm name here]’
Forecasts come in all shapes and sizes, but they usually aren’t measured or tracked for their accuracy.
Moreover, they’re pegged to the market, not to your personal portfolio.
The best analysts make forecasts without any emotion. If they see something bad lining up in the technical or they recognize deteriorating fundamentals in economic numbers, they’re matter-of-fact about the expected outcome.
Respond emotionally and you turn their theories into your next moves.
Money managers and market observers don’t know what is happening in your portfolio, and their job typically involves trying to keep big-money investors happy despite the short attention spans those sharpies have.
But if your stock portfolio has ridden the market this year, it’s up more than 20 percent; even if stocks give back 15 percent from here, you remain on the positive side of the ledger.
Yes, your greedy side takes a hit, and your fearful side worries about what you lost, but your long-term financial plan isn’t significantly impacted either way.
Headline: ‘Current market looks like a mix of 1929, ’99 and 2007’
These comparisons hint at is the troubles at the start of the Great Depression, the bursting of the Internet Bubble and the Great Financial Crisis, but what each of those times also has in common is that they were booming until the market turned over.
No matter how you feel about the analogies and comparisons, references to market crashes definitely stir up the fear.
Trouble hasn’t been repealed and there will be recessions and bear markets again in the future but, with no certainty of when that will happen, it’s important to make hay while the sun shines on the market.
If you’re worried about the potential for storms, come up with response to them.
For some investors, that goes back to diversification or portfolio rebalancing, but for others it means using moving averages to show when to exit a position – you won’t catch the bottom or the top of the market, but you will be riding with the trends – or using trailing stops so that they sell or reduce a position when it starts falling back.
If you don’t fully understand those strategies, learn them, as they can be a sound way to address your fears.
Headline: ‘Cryptocurrencies [nosedive/skyrocket] on latest market whisper’
The mix here is greed and FOMO or the “fear of missing out.” The problem is that cryptocurrencies – but also the meme stocks and other super-heated investments – are like trying to catch a rocket. Get on early and you can enjoy a great ride; catch the tail end and you might burn up. Either way, it’s going to be bumpy.
It’s okay to let your greedy side come out, under control. The joke among crypto believers is that long-term investing there only works for “hodelers,” [rhymes with yodelers], drawn “Holding On for Dear Life.”
If you can’t do that – if your fear and greed will get the best of you so that you buy high and sell low – the solution is simple: Just don’t go there.
Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at firstname.lastname@example.org and tune in at moneylifeshow.com.
Copyright, 2021, J Features