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The Market Cycle…of Emotions Thumbnail

The Market Cycle…of Emotions

What a long strange trip it’s been for the stock market in 2019. Everyone loves a comeback!

After ending last year with a sharp correction, the Dow Jones rebounded with a 17.5%1 return through September – surpassing the 27,000 level in July. Not bad considering the index was below 7,000 a decade ago.

Yet despite a rally that would even impress “the Comeback Kid” Joe Montana himself, there are feelings of stress and unease when gauging people’s overall sentiment on the market.

Could this pessimism stem from uncertainty regarding global trade wars and the upcoming elections? Might it be the mentality that “all good things must come to an end” when we’re in the midst of a decade-long bull market? Maybe it can be blamed on the media for selling feelings of greed or fear by the minute with every screen refresh. Perhaps we’ll check off “All of the above.”

In our 100+ combined years of experience observing the markets and investor behavior, we have learned at least one thing for certain. Investing is an emotional endeavor. Unfortunately, when good people encounter financial angst, the root cause is often a poorly-timed, emotionally-driven decision.

Legendary investor Sir John Templeton famously (and wisely) averred, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” We believe that Sir John is spot-on, but we also recognize that our clients could be feeling some mix of these emotions. Feelings are seldom black and white; more fuzzy than focused.

The “The Market Cycle of Emotions” chart2 on the next page provides a vocabulary and context to the feelings that investors experience at different periods. Times of extreme joy open the door to overconfidence and greediness, and can thereby expose us to additional risk. Conversely, times of despair are when opportunity is actually at its peak. Do you recall the scene from “The World According to Garp” when Robin Williams turns to the realtor after the wayward plane crashes into the second story of the house for sale and says with glee, “We’ll take it! The chances of another plane hitting this house are astronomical. It’s been pre-disastered.”

So why not act on these emotions by buying low and selling high?

Well, unfortunately, the truth of where we are on this chart varies day by day from person to person. Not only is it difficult to pinpoint a consensus feeling in the market, but trying to act in a manner that is counter to these emotions is a task that is either Sisyphean, Herculean, or both.

As a human being it is not easy to sell securities when my account values are going up and it’s certainly not easy to buy when things are grim. Raise your hand if you were just dying to buy more stocks when your equity portfolio had lost 20% of its value last winter. Not many of us are showing our palms in the air for all to see.

All that being said, there is good news!

You don’t have to act on these emotions, and in fact, setting a long-term asset allocation and sticking to it has proven to be a successful strategy over time.

When you’ve developed a clear sense of your capacity to tolerate risk and have designed an asset allocation based on your personal needs, you can let the rest take care of itself. All of us at Encompass are here to guide you through those asset allocation decisions and can help you stay the course when emotions are running high.

Investment advisory services offered through Encompass Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission. 

This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

1Bloomberg   2Russell Investments