August 27, 2021

The Cycle of Market Emotions

I like to say there are eight different emotions we have when investing in the stock market:

  1. Optimistic
  2. Excited
  3. Elated
  4. Concerned
  5. Nervous
  6. Alarmed
  7. Frightened
  8. Relieved

And they will cycle in that order and follow the up and down chart of the stock market.

When people are optimistic, excited, and elated, they believe that this is the right time to buy, in fear of missing out. This point in time poses the greatest potential risk.

When the market starts a downturn, people get concerned but believe it is only temporary. But when the market continues downward, people become nervous and alarmed and believe it is the correct time to sell out of fear of losing everything. And then they become frightened that the downturn will never end. This is the point that has the greatest potential opportunity.

When the market starts to recover, people become relieved and think it is time to re-evaluate getting back into the market. And the cycle repeats itself.

This continued cycle is what most investors use as their investment philosophy, which is perfect, buy high, sell low.

Knowing what part of the cycle of market emotions people are on might help identify when we have the greatest potential risk or opportunity.