The Cycle of Market Emotions

Posted by Bill Prewitt on 24 February 2009 | 1 Comments


Emotions can wreak havoc on an investor's ability to build long-term wealth.  This phenomenon is illustrated in the fact that from the time period from 1988 to 2007, the average stock mutual fund returned 11.6% annually, but the average stock mutual fund investor earned only 4.5%. 

Why did investors sacrifice nearly two-thirds of their potential return?  Driven by emotions like fear and greed, they engaged in such negative behaviors as chasing the hot manager or asset class, avoiding areas of the market that were out of favor, attempting to time the market or otherwise abandoning their investment plans.  Great investors throughout history have understood that building long-term wealth requires the ability to control one's emotions and avoid self-destructive behavior.  


Acknowledging emotions provides perspective of where we lie in a market cycle.  We can rely on the market to squeeze out those investors who do not understand that these emotions are a normal progression, repeated time after time.  I don’t know about you, but doesn’t it feel like we are fast approaching the Point of Maximum Financial Opportunity?
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  • Great graph... it is too bad you never know which stage your in until after you've reached the point of inflection.

    Posted by Brian G, 14/03/2009 7:17pm (10 years ago)

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