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Fear and Greed Part 2

Just as the market can become overwhelmed with greed the same can happen with fear (an unpleasant often strong emotion of anticipation or awareness of danger). When stocks suffer large losses for a sustained period the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy. 

Just as greed dominated the market during the dotcom boom the same can be said of the emergence of fear following its bust. In a bid to stem their losses investors quickly moved out of the stock market in search of less risky buys. Money poured into money markets.  These are no risk lowreturn places to park cash. In fact 2002 saw the largest amount of outflows( about $40 billion) from the stock market since 1988 a year after one of the worst stock market crashes in history and a record $140 billion flowed into the bond market. 

This mass exodus out of the stock market shows a complete disregard for a longterm investing plan based on fundamentals. Investors threw their plans out the window because they were scared overrun by a fear of sustaining further losses. Granted losing a large portion of your portfolio's value is a tough pill to swallow but what is even harder to digest is the fact that these people using the new instruments they replaced their stocks with have very little chance of ever rebuilding their wealth. 

Get Back In the Ring
You see there are only three legal ways of gaining back the wealth lost in the stock market:
1. Win the lottery
2. Earn it back by working for yourself or someone else and that could take many years depending on how much you lost or
3. Make it back in the stock market. 

Yes get right back in the same investing vehicle that the initial losses came from just like a fighter would get back in the ring after a loss.  The reason you get back in is because it is the fastest way to gain back your lost money. The market did not cause anyone to lose their money in the first place.  What caused people to lose their money was themselves.  They lost because they did not know how to prevent losses and as things got worse; their fear of loss caused them to NOT sell until it was too late.  

All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability they become vulnerable to these emotions often resulting in very costly mistakes.  Avoid getting swept up in the dominant market sentiment of the day which can be driven by a mentality of fear and/or greed and stick to your trading plan.  This is why we do not load up before big news is due.  We do not want to get caught up in the emotions of the day. 

Easier Said Than Done
Keep in mind this is not as easy as it sounds. There is a fine line between controlling your emotions and being just plain stubborn. Remember also to reevaluate your trading plan allow yourself to be flexible to a point and remain rational when making decisions to change your plan of action. 

You are the final decisionmaker for your portfolio and thus responsible for any gains or losses in your trades. Sound trading decisions while controlling your emotions is crucial to successful trading.

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