Hey everyone, it’s Justin and Pablo again with Connors Wealth and we’re here today to go over behavioral finance and how emotional investing can cause bad decisions. We are going to go over a chart of the investment cycle and how those emotions can get in there and cause bad decisions. https://www.ftminvest.com/blog
This chart can show us clearly how the different stages are formed. So we start with a Stealth Phase that’s where insiders of the company, the executives, the CEOs, all the even the workers, they start realizing that there’s actual value in the companies and it’s undervalued, so they start putting money in there. Then, institutional and professional investors start to realize that there is actually value, so that’s where smart money starts investing. That’s the Awareness Phase. Then we go into the Mania Phase and that’s where the public realizes it because it’s been going up and that’s where it essentially sky rockets. That’s where you hear it in the news, you’re talking to your neighbors, everyone’s excited about investing again. That’s where you really start to see the complacency when it comes to how much money people can lose and it’s more about how much they can make. There’s no discipline. It’s just basically all in and every dip is an opportunity to buy more.
So what happens at the top of that? Unfortunately at the top, we get an initial sell off that people tend to recognize as another buying opportunity. So because they don’t have anymore discipline, they put even more money and take additional risk going into the market, that’s the bull trap that the chart shows. Everyone thinks it’s going to return to normal. Unfortunately after that, it goes even lower. The people, because they took more risk, end up losing more money and it goes below the initial sell off point and that is called the Blow Off Phase. That’s basically where the real fear sets in and then finding that point that all investors have or at least most investors have is what you that Capitulation like I can’t take it get me out. And that’s what the professionals look for as an opportunity to start getting back in the market they were you know more cautious and conservative on the way down. Once that Blow Off Phase completes and you have despair and return to the mean, it’s right back to the Stealth Phase. It starts all over again. So if we were able to manage our emotions and invest when it’s low and sell when it’s high, we’ll be able to get you the smoother ride.
Well we hope this helps you understand how emotional investing can be detrimental to your performance. That’s what our job is to help you manage those emotions so you can make informed decisions.