Projecting the Investment Horizon: Don’t Let Emotion Get the Best of You
By Michael J. Searcy
If you’re like the majority of the investing public, you may think this diagram depicting the emotional rollercoaster of investing is a great representation of how you feel these days. The diagram takes us through a simplified market cycle starting with a period leading toward strong performance (a bull market) and then falling into a period of weak performance (a bear market), then back to an upturn, thus showing the cycle is never ending. Fluctuation through these cycles can leave investors with feelings of euphoria when things seem to be going great, despair when they’re going bad, and optimism when it seems like poor performance is on its way back up again.
After more than four decades in this industry, I have found that most people really want to get into the market or out of the market at exactly the wrong times. The red arrow on the diagram represents “buying high and selling low,” which is exactly the opposite of what we should be doing. No matter where you feel we are today, this diagram is timeless and you can use it to predict where you think the market is headed based upon current economic events and circumstances, or simply by listening to what others may be saying. An astute investor is one who can recognize the trends and keep their emotions out of their investment practices (or who uses a financial planner that insulates them from the process).
When there is fear rampant in the streets and nobody is buying, it may make sense to sit on the sidelines and see how things go for a period of time. However, when things begin to make improvements and the path seems just a little clearer with some cautious optimism, that might a good entry point. Many investors pass this point up and stay out of the market because they may have just experienced a huge amount of fear and want a significant sign of reassurance that things are back on track. By doing this, they get back into the market when prices are much higher than they’d like. However, if it appears that all caution has been thrown to the wind by investors, you may see that as a time to batten down the hatches and take a more defensive stance. This might help you to sell during a high before corrections happen and you lose the opportunity to cash in on your good investments.
I am not trying to encourage market timing here, because I believe that is a fool’s game. What I am suggesting is that making subtle moves for heavier or lighter weighting (more of a tactical move) in certain holdings could make a big difference in protecting what you have accumulated. If you can successfully figure out where we are on the diagram, you may have greater comfort in making your investment decisions.
Keep in mind that you can use this diagram for the market as a whole but you can also use it for certain asset classes or investment types within various cycles. For example, you can experience a Bear Market for a specific investment class within an overall Bull Market. These cycles are all a smaller part of a long-term cycle and both investor emotions and market situations can turn on a dime. If you are prepared to ride the rollercoaster and keep your emotions in check, it should make for a smoother ride.
Originally published in the Kansas City Star: http://www.kansascity.com/news/business/personal-finance/article31515632.html
Illustration Source: Bob Vere’s Inside Information, July 2015 originally from Liz Ann Sonders presented at a recent advisor conference.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
