UNENDING SAGA OF FEAR AND GREED CYCLE
Fear and greed are everywhere. Most of the time, it influences people negatively. In the market, majority of investors are driven by these two emotions. And if integrated, these can lead to terrible and detrimental effect on portfolios and the market.
Investors can be more fearful of sustaining additional losses when stocks sustain hefty losses for a prolonged time period. They swiftly move out of the equity to look for less risky purchases. Investors simply ignore their fundamental-based investment plan. Conversely, traders can have excessive desire to earn more money, as they aim to generate as much wealth as possible in the shortest time possible. Living by this get-rich-quickly mentality makes it more difficult to track gains and adhere to an investment plan over the long stretch.
The market’s last few years have been an interesting experiment in psychological conditioning and overall complacency. Amid calls for experts’ calls for a correction, markets have not paid attention to any bad news, considering it a positive sign the quantitative easing efforts would continue to uplift the markets and overall economy.
A lot of news items affect the markets worldwide today, including Greece’s potential default and eurozone exit, Ebola, the European Central Bank’s quantitative easing program, Saudi-led coalition airstrikes in Yemen, and slumping oil prices. The list is endless. Having said that, one should remain calm. The more scared you are, the more you will deal with their material. That ultimately results to higher ratings, higher advertising dollars, and a successful outcome for their shareholders. Also, the bears are there in Wall Street. Even if the end is near, be calm.
Fear and greed are inevitable, but we can do something to fight the urge to succumb to these emotions. Before anything else, be familiar with your comfort. Once you lose it, you become more vulnerable to these emotions, often leading to costly mistakes.
Ensure your way to navigating through volatile periods. You may employ a multi-asset approach using bonds, cash, and stocks to reduce the price fluctuations of a portfolio. By having a balanced methodology, you won’t get overweight in a market area that is prone to high risk levels.
You can also make subtle adjustments at opportunistic price points if you feel more restless, probably due to overextending a risk profit to an area deemed uncomfortable. This is to bring your asset allocation back alongside manageable volatility bands.
Or if you find yourself glued to the TV or computer screen, step back, reassess your priorities, and deduce your objectives. Stress is your number one foe and won’t lead to successful long-term results.
In times of downfall in the markets, traders have differing needs. Some might need to execute stop losses and control downside risk. Others might have to modify their allocation. Nevertheless, it all boils down to creating a well-done trading plan, sticking to it, and changing your portfolio based on your needs.
The fear and greed cycle lives on. Nothing can stop it from emerging, but a trader can do something to lower its impact on a portfolio.
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