Investors are driven by the fear of losing and losing out.
Last winter, as the financial markets were seemingly in a free fall, panic and fear reigned. There was a sense that the worldwide financial system could collapse and that the problem was bigger than the government’s ability to solve it. This fear of losing spurred more selling and it became a vicious cycle – until it stopped.
Today, it’s a completely different picture.
The banking system is back from the brink. Liquidity is improving. The S&P 500 index is up about 50% from its March low. And, the economy is showing definite signs of coming back to life.
Ironically, fear is also returning to the markets. However, it is not the fear of losing money; rather, it is the fear of losing out from making a big killing as the markets recover.
Both types of fear have the ability to dramatically move the markets.
To state the obvious, humans are emotional. For example, we’re emotional about relationships, about work, about politics, about religion, about food, and, of course, about money.
As humans oscillate between the fear of losing money and the fear of missing out on making it, we tend to drive the financial markets much lower and much higher than “reason” might dictate.
The tricky question facing investors right now is, “Will the fear of missing out on a big rally drive this market even higher as investors who have been on the sideline decide they have to get in?”
Back in the late 1990s, the technology-led stock market bubble took stock prices to an unprecedented level that was far higher than justified by “fundamentals.” Could history be repeating itself?
Interestingly, as of last Friday, the S&P 500 index was 22% lower than it was 10 years ago.
For the bulls, this suggests the market still has lots of room to run higher and is in no danger of being in bubble territory.
For the bears, they point to a near 50% rise and say it’s time for a breather.
Ultimately, you should strive to take the emotions out of investing. Your investments should be a means to an end as defined by your personal financial plan.
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