| There are many different reasons why people | | | | 3. Market Expansion - Here, the economy is |
| choose to invest in equities, however it becomes | | | | humming along, companies are reporting record |
| a lot more difficult to pick the right equities and | | | | profits and tremendous financial strength. |
| avoid the wrong ones. In many cases, investors | | | | Investors are more willing to invest because of |
| find themselves buying into companies that are | | | | the hope such numbers tend to offer, but are |
| highly valued and selling them weeks, months, or | | | | sometimes reluctant to get into equities because |
| even years later once their value has all but | | | | they want to get in on a pullback. These pullbacks |
| disappeared. This is what is known as the cycle of | | | | may or may not happen. |
| investor emotions which, not surprisingly, are | | | | 4. Market Peak - Here, the markets are at their |
| parallel to the market cycle. | | | | most expensive and the bulk of the gains would |
| There are four (some argue five) documented | | | | have been priced into equity prices by now. |
| emotions when it comes to the market cycle. | | | | However, worried that they have already missed |
| 1. Trough - At this stage, the market has reached | | | | too much, investors will often jump in at this |
| its bottom. Most recently, that would have been | | | | stage - very little is underperforming by now |
| March 9, 2009. Emotionally, however, jumping into | | | | anyway. There are little, if any, signs that the |
| the market is difficult because the market has | | | | economic expansion will end, rates are high and |
| dropped so much that equities are out of favor | | | | the general sentiment is euphoric. |
| and other asset classes (like high yield bonds and | | | | And then of course, the market turns around, |
| gold, most recently) became the flavor of the | | | | beginning the stage of denial that keeps people |
| day. Overall, people are demoralized and | | | | invested in equities that they should actually dump. |
| discouraged about equities and often opt to "cut | | | | They will wait until the trough before offloading |
| their losses" at this stage before it gets any | | | | and switching into another asset class which, by |
| worse. | | | | then, is not only unwise, but too late. |
| 2. Recovery - At this stage, the market is | | | | These investor emotions are quite real. After all, |
| starting to turn around. There is still negative | | | | unlike professional investment managers who play |
| economic data, yet more and more companies | | | | with other people's money, individual investors can |
| are reporting better financial results. Still, investors | | | | associate overtime, sacrifice, blood and tears with |
| are doubtful and stay away in fear of a | | | | their hard-earned investments, making themselves |
| "double-dip" or their other investments are still | | | | that much more sensitive to pain associated with |
| performing quite well. | | | | losses. |