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Personal Wealth and Finance


Understanding Market Psychology and Investor Reaction 

February 1, 2021

Updated February 1, 2020, Copyright AdviceOnMedia®

There is long-standing investor wisdom that has proven over and over again, that: “what goes down must come back up”

Our goal is to manage your money through all market contingencies. That means both 1) the growth periods of the market, and 2)  potential downswings due to the global scare have and can occur (as was experienced in March 2020 due to the pandemic).

Market Psychology and Fear-Based Reaction

Stock markets move, in reality, according to the mass psychology of the people. When the majority of the people optimistically believe in a healthy economy, they invest and stay invested. This belief has funded the tremendous advance of our current economy as people continue to invest more of their savings in business ventures using equity investments. On the flip-side, if people feel pessimistic about the success of companies trading equity stock in the market, they can influence others who follow like lemmings. 

The Danger of Following the Crowd

When many are fearful The risk of following the crowd is that they can run fearfully out of the market precisely at the wrong moment — increasing their extreme risk of loss. It is the collective feelings of the masses that move market trends, up or down. 

History has proven that many have lost much of their savings not by staying in the market but exiting their investment holdings reacting to fear-based news. And many wise investors eventually see their investments return to normal and often better gains in the future. 

It is wise to stick with your existing long-term investment plan, which takes into account stock market volatility. Your plan was carefully constructed to reflect your personal objectives and investment time horizon. Market declines may also represent an opportunity to buy quality companies at attractive prices. Warren Buffet the famous billionaire investor said:

“It is unwise to be fearful when…others are fearful.”

When many are greedy When greed sets in during a bull market investors without the guidance of an advisor can invest based on group hearsay or speculation; also by influences on social media.

Emboldened by big returns, retail investors have turned to riskier tools that use leverage to try to magnify their gains, and, in the process, their influence over stock markets. Call options, for example, involve placing a bet on a stock rising above a specific price within a particular time period. If that bet pays off, the gain can be upward of 10 times greater than simply investing in the underlying stock, depending on the terms of the option contract. If the stock stays below that price, the investor loses the entire amount. 1

The markets witnessed an amazing recovery since the pandemic fears affected the market in March of 2020, the rising significantly in November 2020, and further as of January 29, 2021.

Since markets bottomed last March, the S&P/TSX Composite Index, the Canadian benchmark, is up by 54 per cent. In the U.S., the S&P 500 Index has gained 66 per cent, while the tech-heavy Nasdaq Composite Index has climbed 91 per cent. 2

Many are investing in penny stocks as people invest on emotion.

It’s getting harder to ignore the signs that speculative excess has inflated the bubble in stocks. The IPO market is red hot, social media platforms are teeming with stock-market banter, investor sentiment indicators are off the charts and penny stocks have caught fire. 3

We’re here for you. Our goal is to manage your money through all market contingencies. That means both 1) the growth periods of the market; and 2) any downswing due to the global scare. We continue to hold to the following financial planning values during this time. It is important not to sell investments when they have declined.  The wisdom remains: invest by design. 1. Patient Use of time: Acknowledge market cycles and 2. Do not over-trade: avoid market timing.

Stay the course. Over the long-term corrections are expected in the investment cycle. Investors who stay invested, as opposed to allowing fear to cause them to try to time the markets generally see future increases (as seen in November of 2020, a record-high month in the Dow Jones Industrial Average). The following graph is on design and values based on investing for your future financial security.

 

 

 

 

1, 2, 3 Globe and Mail Jan 29, 2021

 

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