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OCT
11
14 Phases of Investor Emotion

My previous post focused on investor behavior and how attitudes and experiences can affect your investing outcome.  In this post, I'd like to outline the various stages of investor emotion during stock market cycles. There are numerous YouTube videos about the stages, as well as articles posted on stock and options sites which explain the same 14 stages. Although I am not a stock or option trader, and don't recommend that you buy individual stocks, I think the 14 stages can apply to any type of investment decisions and can have an effect on your investment portfolio.  So, let's talk a little bit about it now.

As I mentioned last time, emotions often cloud decision-making and prevent us from acting in a rational manner.  We may never overcome our inherent emotional biases, and if that is the case, we should really try to understand the range of emotions we experience and how it affects our relationship with the market. A market psychology cycle (pictured here) illustrates how emotions evolve in a sequence and the effect they have on our decisions. By understanding the stages of this cycle, we can tame the emotional roller coaster.

 The 14 stages[1] are:

1.       Optimism – A positive outlook encourages us about the future, leading us to buy stocks.

2.       Excitement – Having seen some of our initial ideas work, we begin considering what our market success could allow us to accomplish.

3.       Thrill – At this point we cannot believe our success and begin to comment on how smart we are.

4.       Euphoria – This marks the point of maximum financial risk. Having seen every decision result in quick, easy profits, we begin to ignore risk and expect every trade to become profitable.

5.       Anxiety – For the first time the market moves against us. Having never stared at unrealized losses, we tell ourselves we are long-term investors and that all our ideas will eventually work.

6.       Denial – When markets have not rebounded, yet we do not know how to respond, we begin denying either that we made poor choices or that things will not improve shortly.

7.       Fear – The market realities become confusing. We believe the stocks we own will never move in our favor.

8.       Desperation – Not knowing how to act, we grasp at any idea that will allow us to get back to breakeven.

9.       Panic – Having exhausted all ideas, we are at a loss for what to do next.

10.   Capitulation – Deciding our portfolio will never increase again, we sell all our stocks to avoid any future losses.

11.   Despondency – After leaving the markets we do not want to buy stocks ever again. This often marks the moment of greatest financial opportunity.

12.   Depression – Not knowing how we could be so foolish, we are left trying to understand our actions.

13.   Hope – Eventually we return to the realization that markets move in cycles, and we begin looking for our next opportunity.

14.   Relief – Having bought a stock that turned profitable, we renew our faith that there is a future in investing. 

http://investorzblog.com/wp-content/uploads/2011/08/psy-cycle.gif

I have known investors who ride this roller coaster in their decision-making process.  If you, as an investor, know where you are in the emotional cycle at a given point in time, you will have a greater grasp of how your emotions are affecting your investment decisions. This knowledge will help you manage your own investment portfolio, if you have the confidence to do so, and also to talk to your financial advisor about these stages should you experience them at any time during the investment process. Tip: don't watch the market every day. Invest, don't speculate. Have a financial plan that will help you achieve your long term goals. Know your risk tolerance and understand your own decision-making psychology.  My team and I will be happy to talk to you about any of these issues, especially the roller-coaster stages of emotion during market ups and downs.  In the meantime, go to your city's local fair this summer, buy yourself an E-ticket ride on the roller coaster. It's more fun and won't cost you nearly as much!  Call me at 732-974-3770, write me at blog@froehlichfinancial.com or visit us at www.froehlichfinancial.com.

See you next time!

Tom

 

Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. Froehlich Financial Group, LTD is not an affiliate of APA or APFS.

Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.



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Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

Securities offered through American Portfolios Financial Services, Inc. Member: FINRASIPC. Investment Advisory products/services are offered through American Portfolios Advisors, Inc., a SEC Registered Investment Advisor. Froehlich Financial Group, Ltd. and American Executive Benefits, Inc. are not affiliates of APA or APFS. Executive wealth management products/services are offered through Froehlich Financial Group, LTD. a registered investment advisor



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