How Fear Effects The Financial Markets & Your Investments
One of the big things with investors and when you think about investing and investing in these markets, like the stock market, the bond markets, a bunch of individual investors and there’s institutions too.
But either way there’s people behind all this and two because of fear and greed.
So let’s look at fear first and this is really why sometimes markets go down in like a big downdraft also and everything’s kind of fine.
And then there’s some news hits out there or something happens and suddenly oh my gosh I got to sell everything.
And there’s fear behind that.
And that’s really what is driving it is fear.
And really the fear of the unknown or certainly what ties into it is a fear of loss right.
I don’t want to lose money I don’t wanna lose my principal especially when I initially invested I want to make money.
So I might sell my investments because everything is going down on markets going down and other people are selling out of fear and maybe I get caught caught up in that as well too.
You might hear terms like a flight to safety you’ve ever heard that term.
Let me let’s say like in stocks for example the stock market maybe worldwide or in certain markets like New York Stock Exchange you can fix whatever might be are going down.
And so people are selling and they’re taking that money out and putting into a safer investment cash bonds whatever.
Or their perception of safety so it’s a flight to see them selling out of that and then moving into something else.
So when that happens that flight to safety or the fear compounds the where everybody selling and then the market goes down further than maybe it should based on technical analysis or fundamentals or what might be really happening.
There’s something happening out there that’s causing fear that’s causing the market to go down.
Let’s take a look at it.
A quick example from the recent past here so you can get a kind of a feel for that.
And what that might look like a little better.
Let’s see how this plays out with fear can sometimes drive some results sometimes had good results and understand that so we’re going to kind of look at this and we’re going to look out at Yahoo Finance.
You can see here up in the upper left Cisco to finance that yahoo dot com.
There’s a lot of places you can look up stocks and quotes and things.
That’s all I’m really doing here.
I don’t look up a chart.
So we’re going to type in the you are the you are x b you are x that’s Vanguard European index European stock index What’s the stock index of European stocks right.
The European Union the EU and we’re going look at a chart here for the EU for these stocks in this particular mutual fund a basket of stocks over a particular period of time over a three month time frame rate in the right.
Is we want to compare what is happening when things hit the news or there’s events that might you know cause fear and cause things to happen.
So if we look at the far left of the chart here I know there’s some numbers right here but you can see now kind of like you know where the line is right now that’s kind of was the starting point.
And you can see this back in April of 2016 and everything’s going good.
Find my arrow here and things are going good.
Everything’s good and went down a little bit but our on the rise again and all of a sudden all of something happened right.
We see this big downdraft here.
So what is happening in the round.
If you look at the bottom there June early June of 2016 what was happening there in the EU.
Well it’s Brack’s it.
Remember Prax it.
So Breck’s it is the British citizenry were voting whether to stay in the year pian union or EU or whether they should leave Britain leaving Britain exiting.
That’s the Brecht’s it.
So big news right if they vote to leave.
What does this mean for the markets.
Remember markets react terribly to things that are unknown or causes fear in the markets which are basically people.
So there’s some fear here right.
So what’s happening about this state is there’s fear that boy Britain actually might actually leave
right here their thing and things will probably be OK and the world probably no.
But now being like oh my gosh they might leave.
So then the market and these are each days as we go through here.
Now are their stock market for the European Union this is not just Brin this is the whole European area.
It’s this pump is just going down down down on that fear on the fear of the unknown what does that mean.
Well it got to a bottom point here.
The vote hadn’t happened yet.
And then there are some looking like oh maybe they’re not going to vote maybe you’ll be OK.
Well they’re going to vote but maybe they’ll pass the stay in the EU.
Maybe things will be OK and everything’s like oh now we’re coming back right now or even above where we were.
Everything’s good everything Sonnier things up.
We’re feeling good.
And then the vote comes in and the official vote is oh my gosh.
Fifty two percent say yes we want to leave.
Forty percent say no.
Now that means it passes Breck’s it passes they’re going to leave the European Union.
What does this mean for the opinion with this mean for European stock index fund.
Well it means down down down right.
We go all the way down here and you can see we’re way down in just a matter of a few days from the vote on the or when the markets were open after the 23rd down to the 27.
Four days later you can see this big straight line drop.
That is fear and there’s fear in the news because they don’t know what does this mean what’s going to happen is this going to really hurt Britain.
But is it going to really hurt the overall European Union.
This is all European stocks.
You know if we lead British stocks this would be even worse for them.
But eventually it bottoms out and things start coming back.
A little downdraft and then back up again so start to bounce around and reach the bottom.
And who knows what the future will be.
And this is a long term thing swiftly.
Well the will the leave won’t the you know the vote is yes but what does this mean and how do they actually do it.
I mean there’s a lot of answer question unanswered questions which means a lot of real fear in the market.
So you can see what happens when fear is there.
So if you’re less fearful in this bottom part maybe you’re buying European stocks you’re like get hit a bottom.
You know once again I’m not a big believer in market timing or anything like that but maybe you’re thinking
there might be some opportunities with a stock or a fund they just got beaten down too much.
There’s opportunity there.
I’m more of a believer in regular systematic investment but you can see what fear does.
And they’re saying that if I’m selling now here I’m now selling at the bottom.
Or maybe I’m at the bottom I don’t know.
But but I know I’m less than I was earlier in this the three month period with the click this compare button up here and let’s compare this to the S&P 500 the standard Poor’s 500 basically the 500 largest
United States stock so large U.S. stocks here in the green.
You can see how is trailing the European index and really kind of there and falling along and right behind it.
But when you know they didn’t go down as much in this initial fearful phase.
But when the vote actually happened then the U.S. stock and other stocks around the world went down too.
Not as much but it did go down.
And then they had the same recovery.
You can see they had less of a point here.
Yes we are in a global economy.
But by diversification you can you know maybe come out ahead a little bit on this too and you can see the difference between them.
So in this period of the three month period you can see the S&P 500 on the right there is up 3.6 6 percent where the E.U. is this index Vanguard index is down 4.3 7.
Either way not the end of the world either way.
But understand that if I’m selling here I’m missing out on this regained back here.
You might be right to sell here but am I doing it because the right thing for my goals and my plan or my doing it because of fear.
So just something to be aware of when you’re looking at this is understanding that yes fear comes into play.
News comes into play but it’s a short term thing.
And maybe it’s a real thing like the great recession which was a great recession and stocks went down for a period of time so the bonds were then went down but they all came back on time to the idea of hopefully is that over a period of time and maybe a long period of time that they’ll both rise and come back.
And you can see here if I had reverse my portfolio I am great with my S&P 500.
And yeah I’m down here because of this Brecht’s.
But me and maybe everything else is going to be OK.
But we’ll see.
You know if we looked at this deal maybe a year from now we’ll see what that means maybe five years from now.
What does that mean.
There’s a lot more to go on with Broxburn.
OK so do we do as when these things happen right.
Well one thing that really ties back to your own goals how long your investment time horizon is.
You should have your mix of risk and reward.
I understand that over a long time you’re going to be OK.
But you know in the short term you’ll have the volatility you will have prices go up and down in your stocks and in your basement.
So one thing you can do is do to do nothing to stay the course just stay the course is a phrase my family and I and my wife have used for a long time to kind of withstand these big you know traumatic events
or like in 2008 2009 when stocks went way down.
And that was somewhat fear but also because there are some market things with the financial markets and with a bubble in housing right.
So we stayed the course.
Review your goals you know in your timeframe and your plan you know how are things.
Are you still on track still and plan for those things as far as your goals might sometimes when people are selling really out of fear especially if it’s something in the news that now is driven things like the Prax it maybe there’s an opportunity to buy or at least buy certain things maybe to invest more.
Remember the whole idea is right to buy low sell high wolen stocks and things are going down or bonds or whatever might be that might be an opportunity to buy low.
Just understand why is it going down.
Is it because of fear or is it because there might be something wrong with a particular investment a company is going to go bankrupt.
Well you don’t invest in it it’s going down for a reason.
But maybe there’s opportunities there too.
I’m not talking about market timing. And I’m a big believer in market timing and all.
Just that there might be this unusual opportunity that pops up for a little bit of investment all around something.
And it just brings me joy and relaxation and I feel good and I don’t think I get all wrapped up about like yeah the market’s down the percent today.
You know big deal go up maybe tomorrow or in a month or year.
Who knows what the ideas that will rise over time and I’ll keep investing and as I continue my automatic investing my regular monthly investing or weekly investing maybe I’m buying at a low point and feel good about that.
So the key here on this is that with fear as I understand that if your freight or your gut concerns that’s natural it’s normal it’s human it’s a human behavior.
Understand to try to separate that from your investing strategy and understand investing is a long term game.
It’s a long term plan trading we frequency trading short term that’s something else that’s trading and gambling while gambling is a whole nother thing that’s gambling but investing in serious investing especially if you’re a buy and hold buy things and hold them for long periods of time.
Well that’s a long term gain game.
And you can withstand these ups and downs and withstand fear because you know you’re in it for the long haul.
And so the idea is buy low sell high and maybe there’s opportunities.
But if not just stay the course and keep moving with her investments.
Now the flipside of fear is greed.
That’s what can drive the markets to bad drives in a different direction.
I’ll post about greed on another occassion.