Market cycles and emotions

When things are going well, we feel that we have mastered the game of investment. On the other hand, when things turn out to be bad, one tends to move out of the game and say that stock markets aren’t my cup of tea! Now, the question is why such things happen and who governs this? The answer to both the questions is your emotions. Emotion governs your decision-making ability. Therefore, if you are fearful, you will move out of the market and when you get greedy, you move into the market. However, you need to do exactly the opposite. In this article, we would deal with how emotions in market cycle works.

Stage 1: Optimism, excitement, thrill & euphoria

The cycle usually starts with optimism. Here, people expect returns for the risk of investing. When these expectations are met, you get excited as you see the possibility of a bit of higher returns.

Further, your excitement becomes thrilling as your return expectations exceed. At the top of the market cycle, you will experience euphoria. This is the point of maximum financial risk.

Here, people start believing that they have got similar power like ‘Midas touch’. People start feeling that their investing anywhere is going to bring profits to them but they are only fooling themselves.

Stage 2: Anxiety, denial, fear & desperation

When the market stops meeting new hefty expectations, it begins to turn and moves into the second stage. Firstly, people become more anxious and watch the market in order to find signs of direction. Eventually, this anxiety turns to denial. Here, people deny accepting the fact that the market is going to nosedive.

As the investment value starts decreasing, denial quickly becomes fear. On further decline, fear becomes desperation. In desperation, people start becoming defensive and think about moving out of equity and instead, invest in debt.

Stage 3: Panic, capitulation & despondency

In the third stage, people start seeing the realities of a bear market and they may panic and to stop further losses, they in fact, move out of the market altogether. Those who still hold on to be in the market, become despondent and wonder if the markets would ever recover or whether they should stay in the market at all. The irony of the market is that, at these times, investor fails to recognise as currently, they are at the point of a maximum financial opportunity.

Stage 4: Depression, hope, relief & optimism

When the markets start to rise, investors might turn sceptical. They would often carry a sense of caution, thinking whether the market growth will last or not. With a further rise, there may seem some hope but majority of the people will still be sitting outside the market. This could be an ideal time to enter the market. And with every rise, the market again starts moving towards relief and optimism.