Get the Emotions Out of Your Investment Strategies!

I've been in this industry for approximately 28 years, and I can honestly say that the following chart truly epitomizes how some investors react to price swings in the markets and their portfolios.

The Cycle of Market Emotions 

Investors whom fall to the whim of "The Cycle of Market Emotions" are the same individuals who'll wait for after Christmas or out of season sales to make big purchases. For example, they may buy their fall and winter wardrobes in late spring and early summer and vice versa.

Why do these bargain hunters do just the opposite when it comes to their money? Would they replace their old, but functional A/C unit in mid-July when its 98°, because their neighbor's just went out? No, it doesn't make sense! A better alternative will be to wait until it's truly necessary or at least make a planned purchase in say fall, when HVAC professionals aren't booked solid and you're not paying a premium.

The following video is very insightful regarding this issue, especially since the 3rd quarter of this year was the worst for U.S. stocks since 2011. The investment professional in this video notes that the current negative sentiment about stocks is actually a positive, because expectations are so low, that often sets the stage for a nice rebound. As a matter of fact, he is quoted as saying, "Whenever you have a down Q3 (July 1st through Sept. 30th), Q4 (October 1st through December 31st) is up 90 percent of the time." 

Without giving it all away, please take 3 - 4 minutes to watch the following:

It feels like someone screamed 'fire': Tom LeeIt feels like someone screamed 'fire': Tom Lee

For another perspective on this issue, I turn to Tobias Levkovich, Citigroup's chief U.S. equity strategist and the remarks he made today on CNBC. "With stocks lower on the year, the market on Thursday entered the final three months of 2015 with the prospect of a complete turnaround that could extend the bull market into a seventh year...We're talking about kind of double-digit returns — mid teens to high teens [percent] — type of returns."

He went onto to say, "I try not to let my emotions get in the way." He noted that he's been tracking emotions with Citi's Panic/Euphoria model. As such, he said, "We've been five weeks in panic," which serves as a contrarian indicator. "That actually yields a 96% probability the markets are up a year from now."

Please take a few moments to hear all his comments on why he's bullish on stocks, which is contrary to many investor's emotions currently.

Citi strategist sees uber-bull move for end of 2015Citi strategist sees uber-bull move for end of 2015

If you really need to express your emotions or have something to key in on that may not cloud your judgment and negatively impact your finances, then focus on the Royals and their post season race for the World Series, or the Chiefs next game or maybe even who your son or daughter is going to homecoming with. Otherwise, you may financially shoot yourself in the foot.

We all like getting a bargain, especially if you've ever been to a garage sale or swap meet. However, that portion of our brain most often misfires or does the exact opposite when it comes to your investments - fixating on buying when things are up and selling when they go down. You would not rush to the store to buy a new pair of shoes, because they raised the price 25% over the last three months. Nor should you sell investments just because you've experienced a decline in the value of some of your holdings. Neither action makes any sense! The gambling and timeshare industries have both enjoyed huge success by preying on people's emotions. That being said, how many of you hear friends or relatives brag about how much they've profited from either of these is very few if any! 

Panicking during routine market downturns, especially one that we've not seen for over four years, is not much different than refusing to hop back on a bicycle because in your first attempt, you fell off and scraped your knee and it hurt. Look, as adults no one can control whether you get back on a bicycle or what you do with your money. All I or others can do is provide guidance and strong encouragement during all ups or downs and hope you stay the course. 

Well, long-term investing is no different. If you're not persistent, and overcome setbacks, then you'll never enjoy the freedom of going on bike rides or meeting your financial objectives.

Just remember, when it comes to money and emotions, it's those who can remain level-headed and calm who come out ahead in the long run. If you have questions or concerns regarding your investments, call us. That's what we're here for. Otherwise, root for the Royals and enjoy the nice fall weather.


“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”

                   Seth Klarman

"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."

                   Robert G. Allen

 Quotes selected by the IAG Staff

“Human behavior flows from three main sources: desire, emotion and knowledge.”


"Only when you combine sound intellect with emotional discipline do you get rational behavior."

                   Warren Buffett


Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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