Sine of the Times
Investors, broadly, make rational decisions sometimes. For all the other times, emotion plays a part. This is not new; this is part of the reason markets go through cycles. The image of a sine wave with its peak and trough can be a useful way to visualize the glory and agony of participating in financial markets. It's normal to feel a range of emotions as we internalize the performance of our portfolios.
Let's go through this Sine wave journey together. As our investments start to make gains, optimism and excitement take shape. We may want to believe that this time is different. A new paradigm is just around the corner as we enter thrill. Momentum carries us to euphoria, and we submit our application to Mensa, the High IQ Society.
But wait, there is a crack in the façade. Just a little bump in the road. Honey, we're still on track, right? Buy the dip. It keeps on dipping. Now is when fear can set in. On paper, you may be about where you started, but emotionally it feels like a loss. It is about this time that Mensa replies with a boilerplate letter. There is no score. It just says you did not pass.
Capitulation: the action of surrendering or ceasing to resist. In an effort to stop the bleeding, investors take action by selling, exit the investment, and exit the emotion, maybe. Perhaps you've held on to a moon bag, just in case. Not worth the trouble of putting it on the market. Anyway, it's worth less.
There is a range of emotions, from optimism to hopeless despondency. This is when investors may think it's over and find a new distraction; maybe there is a baseball game on TV tonight. Maybe the lawn needs to be mowed. But then, just for old times' sake, you drag your thumb down the screen to refresh your portfolio app. There's something new. We haven't seen that color green for a while. Hope leads to relief and once again to possibilities, and we are back to markets charging ahead; welcome home, old friend.
We know that markets go through cycles and that watching your investments make gains and losses can be an emotional roller coaster. You are not alone if you have been or are currently experiencing these emotional swings. Often in the depths of a market decline, it's not known how we will advance out of it. After all, this lack of clarity is partially why declines occur in the first place.
We can't predict the short term. Indeed there is far too much uncertainty. However, we can plan for it. At Vector, we use a bucket-based approach to retirement planning and investing to help manage swings in both markets and emotions. Having a plan and understanding how and when emotions may occur can help us remain focused on what is important and make informed decisions in our lives.
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