Investor Emotions a Clue to Opportunity

Most investors know they shouldn’t try to time the market. Stock markets react to events in ways that are often impossible to predict. The current volatility is a great example. Since the Russian war began, we have had huge swings both up and down on Wall Street, even though the news each day has been generally bad. What causes such wild movements is difficult to assess. There are many forces pushing and pulling stocks on any given day. Sometimes worried investors win, and prices fall. Sometimes the bargain hunters win, and prices rise and sometimes both happen on the same day.

I encourage people to not get caught up in trying to time these short-term market swings, because it is generally a losing proposition. That does not mean the average investor doesn’t have an opportunity to improve their long-term results by making occasional adjustments using “investor timing” rather than market timing. Let me explain the concept.

The main emotions that drive short term markets are fear and greed. It isn’t difficult to detect these market movers because we feel them ourselves. Two years ago, as my family returned from a cruise, we heard news of a strange new virus coming out of China and spreading in Italy. We immediately sensed the fear in the newscasters’ voices and began to feel it ourselves. Our office had a meeting about the situation and we made two determinations. First, we could not tell what effect this virus might have on the investing world. It was too new. But we were fairly confident it would cause fear in the short term since we were feeling it ourselves. So, we decided to move our clients to a slightly more conservative allocation while we waited for the fear to subside.

We expected markets to eventually recover but if we could help our clients avoid some of the downside, we had the chance to improve their long-term results. Avoiding big losses keeps investors from having to dig out of a large hole when markets go up again.

We made the same decision a few weeks ago when the attack on Ukraine seemed likely. We didn’t know how it would all end, but we believed that rising investor fear would suppress stock prices for a time.

In both situations we weren’t trying to time the markets. Nor did we expect to avoid all the pain a temporarily falling market might cause. We were simply using our understanding of the effects of investor fear on stock prices to make some small temporary adjustments that might improve our clients’ long-term results.

If you feel significant fear or greed, others are likely feeling it too. This creates opportunity to make some small and temporary portfolio adjustments that might improve returns over time from what they would otherwise be. Trying to time markets is usually a bad idea. Learning to anticipate how investor fear or greed moves short term markets can help active investors minimize some of the downside.